10-K 1 cnsi-1312014x10k.htm 10-K CNSI - 1.31.2014 - 10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _______________________________________________
FORM 10-K
 _______________________________________________
 (Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number 001-35572
 _______________________________________________
COMVERSE, INC.
(Exact name of registrant as specified in its charter)
 _______________________________________________
Delaware
04-3398741
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
200 Quannapowitt Parkway
Wakefield, MA
01880
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (781) 246-9000
______________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.01 par value per share
The NASDAQ Stock Market, LLC
(NASDAQ Global Market)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
 _______________________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes    x  No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x Yes    ¨  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨ 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
x
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x No


As of July 31, 2013 (the last business day of the registrant’s second fiscal quarter), the aggregate market value of common stock held by non-affiliates of the registrant was $603,724,226 based on the last reported sale price of the registrant's common stock on such date. For purposes of this calculation, executive officers, directors and greater than 10% beneficial owners of the registrant were assumed to be affiliates. However, such assumption should not be deemed to be a determination that such executive officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.
There were 22,258,981 shares of the registrant’s common stock outstanding on April 2, 2014.
 _______________________________________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement to be filed under Regulation 14A within 120 days of the end of the registrant's fiscal year ended January 31, 2014 are incorporated by reference into Part III of this Annual Report on Form 10-K.
 _______________________________________________



COMVERSE, INC. AND SUBSIDIARIES
2013 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 1B.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
 
 
ITEM 5.
 
 
 
ITEM 6.
 
 
 
ITEM 7.
 
 
 
ITEM 7A.
 
 
 
ITEM 8.
 
 
 
ITEM 9.
 
 
 
ITEM 9A.
 
 
 
ITEM 9B.
 
 
 
 
 
ITEM 10.
 
 
 
ITEM 11.
 
 
 
ITEM 12.
 
 
 
ITEM 13.
 
 
 
ITEM 14.
 
 
 
 
 
ITEM 15.




FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes “forward-looking statements.” Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “expects,” “plans,” “anticipates,” “estimates,” “believes,” “potential,” “projects,” “forecasts,” “intends,” or the negative thereof or other comparable terminology. By their very nature, forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results, performance and the timing of events to differ materially from those anticipated, expressed or implied by the forward-looking statements in this Annual Report. Such risks or uncertainties may give rise to future claims and increase exposure to contingent liabilities. These risks and uncertainties arise from (among other factors) the following:
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the risk that if customer solution order activity does not increase, our revenue and profitability will likely be materially affected and we may be required to implement certain measures to preserve or enhance our operating results and cash position;
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our ability to anticipate customer demand for new products and technologies, and our advanced offerings may not be widely adopted by existing and potential customers and increases in revenue from our advanced offerings, if any, may not exceed or fully offset potential declines in revenue from traditional solutions and technologies;
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the generation of a significant portion of our revenue from two major customers could materially adversely affect our revenue, profitability and cash flows if we are unable to maintain or develop relationships with these customers, or if these customers reduce demand for our products;
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the difficulty in predicting quarterly and annual product bookings as a result of a high percentage of orders typically generated late in fiscal quarters and in fiscal years, lengthy and variable sales cycles, and our focus on large customers and projects;
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the risk that the occurrence of implementation delays or performance issues in projects accounted for using the percentage-of-completion method which are not provided for in our estimates for a given fiscal period may result in significant decreases in our revenue in subsequent fiscal periods;
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decline or weakness in the global economy may result in reduced information technology spending and reduced demand for our products and services;
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conditions in the telecommunications industry have harmed and may continue to harm our business, including our revenue, profitability and cash flows;
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restructuring initiatives to align operating costs and expenses with anticipated revenue could have an adverse impact on our product development, project deployment and the timely execution of our business strategy;
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our ability to enhance existing products and develop and market new products in response to rapidly changing technology in our industries;
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if we are unable to establish and demonstrate the benefits of new and innovative products to customers after investing time and resources, our business will be adversely affected;
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our dependence on contracts for large systems and large installations for a significant portion of our sales and operating results could adversely affect our business;
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the potential incurrence of fees, penalties and costs if our solutions develop operational problems and significant costs to correct previously undetected operational problems in our complex solutions;
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our dependence on a limited number of suppliers and manufacturers for certain components and third-party software could cause a supply shortage and/or interruptions in product supply;
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our reliance on third-party subcontractors for certain company functions;
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the risk that increased competition could force us to lower our prices or take other actions to differentiate our products and changes in the competitive environment in the telecommunications industry worldwide could seriously affect our business;
•
the risk that increased costs or reduced demand for our products resulting from compliance with evolving telecommunications regulations and the implementation of new standards may adversely affect our business and financial condition;

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•
the risk that environmental and other related laws and regulations could result in significant liabilities and costs;
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the risk that the failure or delay in achieving interoperability of our products with our customers' systems could impair our ability to sell our products;
•
the competitive bidding process used to generate sales requires us to expend significant resources with no guarantee of recoupment;
•
third parties' infringement of our proprietary technology and the infringement by us of the intellectual property of third parties, including through the use of free or open source software, could have a material adverse effect on our business;
•
risks of certain of our contractual obligations exposing us to uncapped or other significant liabilities;
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our dependence upon hiring and retaining highly qualified employees;
•
the risk that environmental and other disasters may harm our business;
•
risks associated with significant foreign operations and international sales, including the impact of geopolitical, economic and military conditions in foreign countries, conducting operations in countries with a history of corruption, entering into transactions with foreign governments and ensuring compliance with laws that prohibit improper payments;
•
potential adverse fluctuations of currency exchange rates;
•
risks relating to our significant operations in Israel, including economic, political and/or military conditions in Israel and the Middle East, and uncertainties and restrictions relating to research and development grants, tax benefits and the ability of our Israeli subsidiaries to pay dividends;
•
for as long as we are an emerging growth company, we are exempt from certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies, which may cause some investors to find our common stock less attractive and result in a less active trading market and more volatile stock price for our common stock;
•
the cost of compliance or failure to comply with the Sarbanes-Oxley Act of 2002 may adversely affect our business;
•
the risk that we may continue to incur significant expenses for professional fees in connection with the preparation of our periodic reports;
•
our obligation to indemnify Comverse Technology, Inc., our former parent (or CTI) and its affiliates (including Verint Systems Inc. (or Verint) following the merger of CTI with and into a subsidiary of Verint (referred to as the Verint Merger) after the Verint Merger against certain claims or losses that may arise in connection with the Verint Merger and the spin-off of our company as an independent, publicly-traded company, accomplished by means of a pro rata distribution of 100% of our outstanding common shares to CTI's shareholders (referred to as the Share Distribution);
•
the risk that future changes in stock ownership could limit our use of net operating loss carryforwards;
•
potential significant liabilities for taxes of the CTI consolidated group for periods ending on or before the Share Distribution date, and possible indemnity obligation to CTI for any tax on the Share Distribution;
•
potential exposure to liabilities arising out of state and federal fraudulent conveyance laws and legal dividend requirements related to the Share Distribution; and
•
risks related to the ownership and price of our common stock.
These risks and uncertainties discussed above, as well as others, are discussed in greater detail in Part I, Item 1A, “Risk Factors” of this Annual Report. The documents and reports we file with the SEC are available through Comverse, or our website, www.comverse.com, or through the SEC's Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) at www.sec.gov. We undertake no commitment to update or revise any forward-looking statements except as required by law.

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PART I
ITEM 1.
BUSINESS
Overview
We are a leading provider of telecom business enablement solutions for communication service providers (or CSPs) through a portfolio of product-based solutions and associated services in the following domains:
•
Business Support Systems. We provide converged, prepaid and postpaid billing and active customer management systems (or BSS) for wireless, wireline, cable and multi-play CSPs, delivering a value proposition designed to enable an effective service and data monetization, a consistent, enhanced customer experience, reduced complexity and cost, and real-time choice and control.
•
Policy Solutions. We provide CSPs with the ability to better manage their data networks and to better monetize their data network investment through our Policy Management and Policy Enforcement capabilities for wireless and wireline data networks.
•
Digital Services. We enable voice and messaging services (including voicemail, visual voicemail, call completion, short messaging service (or SMS), and multimedia picture and video messaging (or MMS), and digital lifestyle services and Internet Protocol (or IP) based rich communication services (including group chat, file transfer, video share, social, presence and geo-location information).
•
Managed and Professional Services. We offer a portfolio of services related to our solutions following the completion of the delivery of the project to the customer (referred to as managed services).
Products
Our product-based solutions and related services enhance wireless, wireline and cable networks both for end users and the CSPs themselves.
For end users, we apply the knowledge acquired throughout the network to provide an enhanced, intuitive and personalized experience to the end user through a broad array of services.
For CSPs, the enhanced end user experience is expected to result in greater customer loyalty, lower customer churn and higher adoption of new services to increase average revenue per user (or ARPU) levels. By leveraging the unique end user information residing in their networks, CSPs can take advantage of a key strategic strength as they compete with other CSPs and Internet-based competitors.
Our solutions are available in a variety of delivery models, including on-premises, cloud, hosted, SaaS and managed services. Our portfolio includes the following product categories:
BSS Solutions
CSPs typically rely on third-party software vendors to provide BSS solutions that include customer billing functionality. Billing is divided into three categories: prepaid billing is utilized when a subscriber purchases credit in advance of service use and the usage is authorized in real time; postpaid billing is provided when a subscriber pays the CSP at the end of a billing period for services utilized; and converged billing enables management of multiple services for CSPs, including payment for prepaid and postpaid subscribers across fixed and mobile communication, broadband, TV and other emerging services. As CSPs expand their services, we expect the converged billing market to grow faster than the prepaid and postpaid billing markets.
Our BSS solutions enable our customers to: (i) introduce new products quickly, (ii) charge flexibly for a broad range of services or content delivered over their networks, (iii) perform real-time marketing to take advantage of more opportunities for upselling, cross-selling and supporting higher ARPU levels and (iv) automate sales and marketing activities. In addition, the solutions are designed to accommodate the customer's growth and business model changes through the ability to add functionality over time.
Converged Solution - Comverse ONE Billing and Active Customer Management Solution
Communication, e-commerce and content CSPs require a strong BSS foundation to ensure timely, accurate billing and fee collection, and a high level of overall customer care and satisfaction. We believe that the Comverse ONE Billing and Active Customer Management solution is differentiated in the market through its single-system approach to BSS convergence, reducing total cost of ownership and enabling faster time-to-market for new CSP offerings.
Our Comverse ONE Billing and Active Customer Management solution is a single comprehensive product that accelerates data monetization and provides billing and customer relationship management for CSPs by integrating policy

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management, policy enforcement and BSS elements. The solution can be deployed in various ways to meet the specific needs of CSPs. Deployment modes include:
•
Comverse ONE Converged Billing and Active Customer Management solution, which can support a combination of real-time prepaid charging, postpaid billing, and converged (hybrid) charging on a single platform and provides subscriber management;
•
Comverse ONE Real-Time Billing for prepaid billing; and
•
Comverse ONE Online and Converged Charging to bring real-time capabilities to customers' existing postpaid billing systems.
Prepaid Solution -Real Time Billing
Our Real-Time Billing (or RTB) product is an in-network prepaid billing solution for CSPs (mainly wireless service providers) that was primarily deployed in emerging markets. We continue to support our customers to enhance their use of RTB in support of their business needs. We also offer customers seeking advanced charging capabilities the option to upgrade RTB to Comverse ONE in its Real-Time Billing deployment mode. In addition, we offer customers seeking to add support for postpaid subscribers or additional BSS elements the option to upgrade their RTB system to Comverse ONE in its converged billing deployment mode.
Postpaid Solution - Comverse Kenan
Our Comverse Kenan billing product is a comprehensive postpaid billing and customer care solution that enables CSPs to effectively monetize existing and new services, shorten time to market for new offers, and efficiently manage revenues. Comverse Kenan has a broad installed base that includes wireline, wireless and PayTV CSPs, for both consumer and business to business (or B2B) environments. As a product-based solution, it is designed to assist CSPs to reduce their total cost of ownership.
We continue to invest in providing our Comverse Kenan customers with relevant and effective upgrade options and a roadmap in support of their evolving business needs and their strategic plans, including:
•
enhancing the billing capabilities of Comverse Kenan systems to support CSPs’ changing business needs, including the option of upgrading to the latest Comverse Kenan product release;
•
evolving and extending the Comverse Kenan solution with additional BSS elements, adjacent to the core Comverse Kenan solution, such as RTB for postpaid subscribers, policy management, increased flexibility around data management and monetization, and marketing-related capabilities; and
•
offering customers seeking to add support for prepaid subscribers or additional real-time BSS elements, the option to upgrade their Comverse Kenan system to Comverse ONE in its converged billing deployment mode.
Comverse Policy Solutions
Integrated with BSS, Comverse Policy Solutions enable CSPs to manage and monetize their data services smartly, utilizing a range of network-related and subscriber-related information.
Comverse Policy Manager
Designed as a business-oriented tool, Comverse Policy Manager uses a unique marketing-focused policy creation tool (referred to as Policy Studio) to facilitate swift and intuitive definition of multiple business and monetization scenarios and use cases, including segmented data plans, application-based charging, traffic and quota management, roaming and bill shock prevention, shared device and family plans, and congestion control.
Comverse Policy Enforcer
Comverse Policy Enforcer is a modular policy enforcement solution that enables CSPs to bring a broad range of business scenarios rapidly to market, utilizing any or all of our enforcement elements, minimizing integration costs between the Comverse Policy Manager and multiple silo enforcement elements, including traffic and quota management and application-based charging).
Digital Services Solutions
CSPs engage external software vendors to provide a range of communication services, including voice and messaging Value Added Services and digital lifestyle services and IP-based rich communication services (or RCS).

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Value Added Services (VAS)
Voice solutions include voicemail, call completion and call management, and visual voicemail. Messaging solutions include SMS and MMS services.
Comverse Voice enables the following services: 
•
Comverse Next-Generation Voicemail provides call answering functionality to telecom users, designed to ensure a higher level of call completion and returned calls for wireless and wireline network CSPs and thereby often generates additional minutes of use. Comverse Next-Generation Voicemail leverages multimedia platforms through Comverse’s Videomail solution and is designed to support Mobile Advertising, thereby creating new revenue opportunities from existing network traffic. Voicemail is offered by most of the world’s wireless network operators as part of a bundled package of communication services and is offered by wireline network operators on a more limited basis and often for an additional fee.
•
Visual Voicemail provides users with a visual inbox user interface for more convenient and appealing message management, including address book integration for “record-and-send” one-to-one and one-to-many voice messaging. Visual Voicemail continues to be launched in a number of networks and its deployment corresponds to the continued proliferation of “smartphones.” Popularized by the iPhone, Visual Voicemail has been launched by many iPhone carriers and a number of additional smartphone carriers. CSPs are expected to continue launching next generation visual voicemail given the continued proliferation of “smartphones” and their ability to offer enhanced visual experiences to users.
•
Call Completion services notify users of missed inbound calls via text message, offer convenient one-touch call return functionality, and notify callers when previously unavailable parties become available to accept calls. These services increase the likelihood that call attempts ultimately result in a successful connection, and thereby often result in additional minutes of use. In addition, these services are designed to integrate with mobile advertising solutions to offer CSPs advertising channels.
Comverse Messaging enables the following services:
•
Short Message Service Center and Messaging Router enable texting which is used for an expanding range of purposes, including person-to-person messaging, televoting, application-to-person messaging such as information and entertainment alerts, and social network-based messaging, such as Twitter updates. Texting has achieved mass market mobile end user adoption levels, and is currently one of the world’s most popular wireless enhanced services.
•
Messaging Gateway provides a secure and managed multi-channel entry point into the operator’s network for external messaging content and applications, user-generated content and social networking.
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Multimedia Messaging Service Center enables the sharing and messaging of pictures and video over wireless networks, including person-to-person and application-to-person multimedia messaging. These services have become feasible and more functional with the proliferation of next-generation networks and “smartphones,” thereby making them potentially more attractive to a greater number of subscribers. For example, the growth in mobile camera-phones and video recorder phones has led to an increase in MMS-based picture and video messaging adoption and traffic.
Comverse MultiVAS
MultiVAS is a fully virtualized and modular solution that enables the convergence of SMS, MMS and next-generation voice messaging over IP-based fourth generation (or 4G) networks. This converged modern single foundation is designed to offer significant savings to CSPs, simplify operations and provide the required path to IP-based messaging and rich communication services.
Comverse Evolved Communication Suite (ECS) 
The Comverse Evolved Communication Suite (ECS) enables CSPs to evolve traditional voice calling and messaging services such as SMS, MMS and visual voicemail to a digital experience across any Internet-connected device, building a critical mass of users for CSPs’ IP-based rich communication services and leveraging existing voice and messaging services to become an integral part of subscribers’ digital lifestyles.
Comverse IP Enterprise Communications Solutions
Our IP-based enterprise communications solutions provide CSP-hosted, IP-based enterprise services that enable CSPs to deliver Voice over IP (or VoIP) telephony, fixed-mobile converged voice, video and messaging services, IP

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Centrex enterprise communications services, and IP IMS-based services. These products allow CSPs and enterprises to benefit from feature-rich, lower cost IP-based services.
Managed and Professional Services
We have a strong commitment to provide high-quality managed and support services to our customers because of the critical functionalities performed by our solutions, and customers' need for high system performance and availability and minimum system interruptions.
Our Comverse Services organization provides customers with services including system care, expert services, and managed services, delivering CSP business outcomes across the entire Comverse portfolio.
The principal business objectives of Comverse Services are to:
•
build and strengthen long-term partnerships with customers, provide high-quality maintenance and ongoing support; and
•
maximize customer performance by enabling customers to fully utilize the potential of their Comverse solutions through a suite of managed services.
Maintenance and Support Services
Through our service and support organization, we leverage our product knowledge, broad industry expertise, and field-tested methodologies to efficiently maintain our solutions within various markets and operational environments and provide a continuous approach to service. These services are delivered globally through centralized centers of expertise and local support professionals. This service category includes:
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Software Support Services: Post-go-live support, including a 24-hours a day, seven days a week call center and online support and maintenance releases;
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Hardware Support Services: For selected products, associated hardware support services, including spare parts inventory management service; and
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Proactive Maintenance: Specialized preventive maintenance activities designed to enhance CSPs' operational performance, including system health-check audits and continuous engineering activities.
We offer levels of maintenance and services packages, with varying levels of access to a Technical Assistance Center hotline for remote support, committed response times for critical maintenance and support issues, hardware repair and replacement, and other proactive tools and a la carte support services to address the needs of our customers.
We offer up to a one year limited warranty on all products and offer broader warranty and service coverage in certain cases.
Managed Services
As part of the implementation of our business strategy and our commitment to our customers, we provide CSPs with a suite of managed services that cover our BSS, Digital Services and Policy solutions. Comverse Managed Services are designed to help CSPs efficiently run their business processes centered around Comverse platforms, mitigate business transformation risks, enhance the customer experience and accelerate time to market.
Our Managed Services portfolio includes:
•
Managed Operation: Manage and operate customers' Comverse solutions, including the adjacent ecosystem to allow customers to leverage our expertise to maximize the operational performance and utilization of their Comverse systems and the related business processes;
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Managed Transformation: In this solution customers engage us to provide them with Managed Operation for their legacy platforms and processes while Comverse transforms and migrates them to and operates the new Comverse solutions that replace the customer’s legacy platform;
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Software as a Service (or SaaS) Solutions: Offer our applications in a hosted “all-in” business model, which helps customers to optimize their capital expenditure spend and to focus on their business objectives, while we handle all aspects of the solution offered in a SaaS model; and
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Expert Services: Short-term and long-term engagements of experts, often at clients' sites, in the form of task based services or expert augmentation.
Professional Services

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Our professional services experts expand the scope of managed services to develop and deliver custom applications that help CSPs meet challenges set by competition, customers and users, regulators, internal stakeholders and evolving technology.
Training Services
We provide training services primarily in our facilities and on site at customers' facilities.
Markets
Our products help our CSP customers generate and monetize billable traffic, usage, subscription and other service-related fees. Our products are designed to:
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generate CSP network traffic and revenue;
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improve CSP ARPU;
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strengthen end user satisfaction and loyalty by promoting retention and minimizing customer churn;
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monetize services through timely and accurate rating, charging, mediation and billing; and
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improve operational efficiency to reduce CSP network operating costs.
We market our product and service portfolio primarily to CSPs, such as wireless and wireline network CSPs, cable CSPs, content communication service providers and e-commerce providers. Our product and service portfolio generates fees for CSPs on a subscription, pay-per-usage or advertising-supported basis.
Our entire portfolio of software, systems and related services has been designed and packaged to meet the capacity, reliability, availability, scalability and maintainability of large telecommunications network CSPs. Our products support flexible deployment models, including on-premises, hosted and cloud solutions, SaaS business models or managed services, and can run on circuit-switched, IP, IMS, and converged network environments. The systems are offered in a variety of sizes and configurations, and are available with redundancy of critical components, so that no single failure will interrupt the service.
Traditionally, CSPs derived their revenue almost exclusively through voice calling. Voice telephony services, however, have become increasingly commoditized, and this trend has led service providers to seek new sources of revenue and service differentiation, by offering messaging, data, content and other enhanced digital services and by improving the overall end user experience, through superior relationship management and service.
Sales and Marketing
We market our products throughout the world, primarily through our own direct sales force, and also in cooperation with a number of partners in specified markets. These partners include systems integrators, telecommunications infrastructure suppliers and independent sales representatives.
Our sales force is deployed globally. Account management teams are supported by solution experts who collaborate to specify solutions to fit the needs of our current and prospective customers.
We also provide customers with marketing consultation, seminars and materials designed to assist them in marketing enhanced communication services, and further undertake an ongoing role supporting their business and market planning processes. These services are designed to promote the successful launch, execution, and end user adoption of Comverse-enabled applications to stimulate ongoing service provider customer capacity expansion orders.
Customers
We market our products primarily to CSPs, such as wireless and wireline, cable and content communication service providers. Our customer base includes more than 450 CSPs in more than 125 countries, including a majority of the 100 largest wireless network CSPs in the world.
For the fiscal years ended January 31, 2014 and 2013, Cellco Partnership (d/b/a as Verizon Wireless) accounted for approximately 18% and 14%, respectively, of our consolidated and combined revenue. No other customer, including system integrators and value-added resellers, individually accounted for more than 10% of our combined revenue for any of the fiscal years ended January 31, 2014, 2013 or 2012.
For the fiscal year ended January 31, 2012, a single customer accounted for approximately 13% of BSS's revenue. No other customer individually accounted for more than 10% of BSS's revenue for any of the fiscal years ended January 31, 2014, 2013 or 2012.
For the fiscal year ended January 31, 2014, two customers individually accounted for approximately 34% and 10%, respectively, of Digital Services' revenue. For the fiscal year ended January 31, 2013, two customers individually

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accounted for approximately 24% and 15%, respectively, of Digital Services' revenue. No other customer individually accounted for more than 10% of Digital Services' revenue for any of the fiscal years ended January 31, 2014, 2013 or 2012.
Competition
The market for our converged, prepaid and postpaid BSS, Policy, and Digital Services solutions is highly competitive, and includes numerous products offering a broad range of features and capacities. Our primary competitors are network providers, suppliers of turnkey systems and software, and indirect competitors that supply certain components to systems integrators. Competitors of our BSS and Policy solutions include Amdocs, CSG Systems, Ericsson, HP, Huawei, NEC, Oracle, Redknee and ZTE. Competitors of our Digital Services solutions include Acision, Alcatel-Lucent, Ericsson, HP, Huawei, Mavenir, Movius, NEC, Nokia Siemens Networks, Openwave, Oracle, Tecnotree, Unisys and ZTE. Some of our competitors are significantly larger and at times may be able to bundle BSS transformations and Digital services solutions with an overall network deployment project and as a result may put pressure on prices. Certain Asian competitors have cost structures and financing alternatives that allow them in certain locations to also put pressure on prices. In addition, our competitors that manufacture other network telecommunications equipment may derive a competitive advantage in selling systems to customers that are purchasing, or have previously purchased, other compatible network equipment from such manufacturers. Furthermore, many of our competitors specialize in a subset of our portfolio of products.
Participants in the BSS market have traditionally provided postpaid only (IT-based) BSS solutions, or on-premises-based prepaid/real-time systems. In recent years, the BSS market has changed to require market participants to offer converged BSS solutions to address the evolving needs of CSPs. In addition, due to the increased use of data in connection with the deployment of smartphones and other devices, such as tablets, BSS solutions are now focused on data monetization. Generally, our competitors offer multi-system solutions for convergence while we offer a unified BSS solution to address both prepaid and postpaid, as well as combined (converged) accounts. We believe that our unified BSS solution, which is designed to lower total cost of ownership and facilitate faster time to launch new services, plans and campaigns, is superior to the multi-system solutions offered by our competitors. In addition, we offer a subscriber-based approach to data monetization by linking Comverse ONE with our Policy solutions. However, CSPs may not acknowledge the benefits of this combined solution and elect to purchase alternative solutions offered by our competitors. In addition, competitors may develop internally or acquire BSS and Policy solutions that could allow them to offer unified solutions, which may result in a decline in our competitive position and market share.
In the Digital Services market, wireless subscriber preferences have changed in recent years as consumers transitioned from traditional VAS services to alternative IP-based applications with the deployment of smartphones and other devices, such as tablets. This transition has resulted in intensified competition due to the change in our business mix from circuit-switched to IP-based product lines that may provide alternatives to our products and services. We believe our leading market position in circuit-switched VAS (including voice and messaging), our substantial installed base and our strong expertise in IP communications give us a competitive advantage in providing solutions for the evolution of our customer base to 4G IP networks.
We believe that competition in the sale of our products is based on a number of factors, the most important of which are: the ability to effectively address changing market needs, product features and functionality, system capacity and reliability, marketing and distribution capability and price. Other important competitive factors include service and support and the capability to integrate systems with a variety of telecom networks, IP networks and Operation and Support Systems. We believe that the range of capabilities provided by, and the ease of use of, our systems compare favorably with other products currently marketed. We anticipate that competition will increase, and that a number of our direct and indirect competitors will continue to introduce new or improved systems during the next several years.
Manufacturing and Sources of Supplies
Our manufacturing operations consist primarily of installing software on externally purchased hardware components and final assembly and testing, which involves the application of extensive quality control procedures to materials, components, subassemblies and systems. We primarily use third parties to perform modules and subsystem assembly, component testing and sheet metal fabrication. These manufacturing operations are performed in Israel.
Although we generally use standard parts and components in our products, certain components and subassemblies are presently available only from a limited number of sources. To date, we have been able to obtain adequate supplies of all components and subassemblies in a timely manner from existing sources or, when necessary, from alternative sources or redesign the system to incorporate new modules, when applicable.

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We maintain global management systems assuring compliance with the ISO 9001, 14001, 27001 and OHSAS 18001 standards for our research and development, manufacturing and service domains, as well as for our worldwide offices as applicable.  Additionally, we have achieved eTOM certification for our BSS solutions which are marketed and implemented globally.
Backlog
As of January 31, 2014 and 2013, we had a backlog of approximately $645 million and $811 million, respectively. Approximately 57% of our backlog as of January 31, 2014 is not expected to be filled in the fiscal year ending January 31, 2015. We define “backlog” as projected revenue from signed orders not yet recognized, excluding revenue from maintenance agreements. Orders constituting backlog may be reduced, cancelled or deferred by customers. Approximately $7.4 million of the decline in backlog is attributable to a reduction in scope of existing orders primarily due to project reductions, cancellations and penalties.
Significant Transactions
Merger of CTI and Verint
On August 12, 2012, CTI entered into an agreement and plan of merger (referred to as the Verint Merger Agreement) with Verint Systems Inc. (or Verint), its then majority-owned publicly-traded subsidiary, providing for the merger of CTI with and into a subsidiary of Verint to become a wholly-owned subsidiary of Verint (referred to as the Verint Merger). The Verint Merger was completed on February 4, 2013. We agreed to indemnify CTI and its affiliates (including Verint after the Verint Merger) against certain losses that may arise as a result of the Verint Merger and the Share Distribution. For more information, see note 3 to the consolidated and combined financial statements included in Item 15 of this Annual Report.
Research and Development
We continue to enhance the features and performance of existing solutions and introduce new solutions through extensive research and development activities. We believe that our future success depends on a number of factors, which include the ability to:
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identify and respond to emerging technological trends in our target markets;
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develop and maintain competitive solutions that meet or exceed customers' changing needs; and
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enhance existing products by adding features and functionality that differentiate our products from those of our competitors.
As a result, we have made and intend to continue to make investments in research and development. Research and development resources are allocated in response to market research and customer demands for additional features and products. The development strategy involves rolling out initial releases of products and adding features over time. We continuously incorporate customer feedback into the product development process. While we expect that new products will continue to be developed internally, we may, based on timing and cost considerations, acquire or license technologies, products or applications from third parties.
Significant research and development activity occurs in the United States and Israel with additional research and development offices in Bulgaria, Canada, China, the Czech Republic, France, India, and the United Kingdom. Research and development leverages broad industry expertise, which includes, computer architecture, telephony, IP, data networking, multi-processing, databases, real time software design and application software design.
A portion of our research and development operations benefit from financial incentives provided by government agencies to promote research and development activities performed in Israel. The cost of such operations is, and will continue to be, affected by the continued availability of financial incentives under such programs. Our research and development activities included projects submitted for partial funding under a program administered by the Office of the Chief Scientist of the Ministry of Industry and Trade of the State of Israel (or the OCS), under which reimbursement of a portion of our research and development expenditures is made subject to final approval of project budgets. Although the Government of Israel does not own proprietary rights in the OCS-funded Products and there is no specific restriction by the OCS with regard to the export of the OCS-funded Products, under certain circumstances, there may be limitations on the ability to transfer technology, know-how and manufacturing of OCS-funded Products outside of Israel. Such limitations could result in the requirement to pay significantly increased royalties or a redemption fee calculated according to the applicable regulations. The difficulties in obtaining the approval of the OCS for the transfer of technology, know-how, manufacturing activities and/or manufacturing rights out of Israel could impair the ability of some of our subsidiaries to outsource manufacturing, enter into strategic alliances or engage in similar arrangements for

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those technologies, know-how or products. There were no new programs initiated with the OCS during the fiscal year ended January 31, 2014.
Our gross research and development expenses for the fiscal years ended January 31, 2014, 2013 and 2012 were $67.6 million, $77.0 million and $94.3 million, respectively. Amounts reimbursable by the OCS and others for the fiscal years ended January 31, 2014, 2013 and 2012 were $0.1 million, $0.5 million and $0.1 million, respectively.
Patents and Intellectual Property Rights
Our success depends to a significant degree on the legal protection our software and other proprietary technology rights. We rely on a combination of patent, trade secret, copyright, and trademark laws and confidentiality and non-disclosure agreements with employees and third parties to establish and protect our proprietary rights.
We currently hold several patents, none of which are material to our operations on an individual basis.
Substantial litigation regarding intellectual property rights exists in technology related industries, and our products are increasingly at risk of third party infringement claims as the number of competitors in our industry segments grows and the functionality of software products in different industry segments overlaps. In the event of an infringement claim, we may be forced to seek expensive licenses, reengineer our products, engage in expensive and time-consuming litigation or stop marketing those products. We have been involved in patent litigations. In the fiscal years ended January 31, 2014, 2013 and 2012, in connection with claims asserted, we entered into several settlements.
Licenses and Royalties
Licenses to third parties by us are designed to prohibit unauthorized use, copying, and disclosure of our software and other proprietary technology rights. We also license from third parties certain software, technology, and related rights for use in manufacture and marketing of our products, and pay royalties under such licenses and other agreements. We believe that the rights under such licenses and other agreements are sufficient for the manufacture and marketing of our products and, in the case of licenses, extend for periods at least equal to the estimated useful lives of the related technology and know-how.
Segment Information
For a presentation of revenue from external customers, income (loss) from operations and certain other financial information for the fiscal years ended January 31, 2014, 2013 and 2012, see note 20 to the consolidated and combined financial statements included in Item 15 of this Annual Report.
Domestic and International Sales and Long-Lived Assets
For a presentation of domestic and international sales for the fiscal years ended January 31, 2014, 2013 and 2012 and long-lived assets as of January 31, 2014, 2013, see note 20 to the consolidated and combined financial statements included in Item 15 of this Annual Report. Our international operations are subject to certain risks. For a description of risks attendant to our foreign operations, see Item 1A, “Risk Factors-Risks Related to International Operations.”
Export Regulations
We are subject to export control regulations in countries from which we export goods and services. These controls may apply by virtue of the country in which the products are located or by virtue of the origin of the content contained in the products. If the controls of a particular country apply, the level of control generally depends on the nature of the goods and services in question. Where controls apply, the export of our products generally requires an export license or authorization (either on a per-product or per-transaction basis) or that the transaction qualifies for a license exception or the equivalent, and may also be subject to corresponding reporting requirements.
Operations in Israel
A substantial portion of our research and development, manufacturing and other operations is located in Israel and, accordingly, may be affected by economic, political and military conditions in that country. We benefit from certain trade agreements and arrangements providing for reduced or duty-free tariffs for certain exports from Israel. Our business is dependent to some extent on trading relationships between Israel and other countries. Certain of our products incorporate imported components into Israel and most of our products are sold outside of Israel. We could be materially adversely affected by hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners, or a significant downturn in the economic or financial condition of Israel. In addition, the sale of products manufactured in Israel may be materially adversely affected in certain countries by restrictive laws, policies or practices directed toward

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Israel or companies having operations in Israel. In addition, many of our Israeli employees are required to perform annual mandatory military service in Israel, and are subject to being called to active duty at any time under emergency circumstances. The absence of these employees may have an adverse effect upon our operations.
We benefit from various policies of the Government of Israel, including reduced taxation and special subsidy programs, such as those administered by the OCS. For a more detailed discussion of the terms of these programs, see “-Research and Development.”
Our results of operations have been favorably affected by participation in Israeli government programs related to research and development, as well as utilization of certain tax incentives and other incentives available under applicable Israeli laws and regulations, some of which have been reduced, discontinued or otherwise modified in recent years. In addition, our ability to obtain benefits under various discretionary funding programs has declined and may continue to decline.
Environmental Regulations
Our operations are subject to certain foreign, federal, state and local regulatory requirements relating to environmental, waste management, labor and health and safety matters. Management believes that our business is operated in material compliance with all such regulations. To date, the cost of such compliance has not had a material impact on our capital expenditures, earnings or competitive position or that of our subsidiaries. However, violations may occur in the future as a result of human error, equipment failure or other causes. Further, we cannot predict the nature, scope or effect of environmental legislation or regulatory requirements that could be imposed or how existing or future laws or regulations will be administered or interpreted. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of regulatory agencies, could require substantial expenditures by us and could have a material impact on our business, financial condition and results of operations.
Employees
As of January 31, 2014, we employed approximately 2,500 individuals. Approximately 36%, 23% and 41% of our employees are located in Israel, the United States and other regions, including Europe and Asia Pacific (or APAC), respectively.
Our U.S. employees are not covered by collective bargaining agreements. Employees based in certain countries in Europe, including France, Italy and Spain, and in the Americas (other than the U.S.), including Brazil, are covered by collective bargaining agreements. These collective agreements typically cover work hour, working conditions, disability, vacation, severance and other employment terms.
We are not a party to any collective bargaining or other agreement with any labor organization in Israel. However, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations (including the Manufacturers' Association of Israel) are applicable to our Israeli employees by virtue of an expansion order of the Israeli Ministry of Industry, Trade and Labor. Under Israeli law, we are required to maintain employee benefit plans for the benefit of our employees (referred to as the employee benefit plans). Each month, both we and our employees contribute sums to the employee benefit plans. The employee benefit plans provide a combination of savings plan, insurance and severance pay benefits to participating employees. Some of the sums we contribute monthly to the employee benefit plans are used to satisfy in part severance pay to which the employees may be entitled under Israeli law. Under Israeli law, we are obligated to make severance payments to employees of our Israeli subsidiaries on the basis of each individual's current salary and length of employment. Under Israel's Severance Pay Law, employees are entitled to one month's salary for each year of employment or a portion thereof. Israeli employees are required to make, and employers are required to pay and withhold, certain payments to the National Insurance Institute (similar, to some extent, to the United States Social Security Administration), on account of social security and health tax payments, for national health insurance and social security benefits.
We consider our relationship with our employees to be good.
Other Information
Our common stock is traded on the NASDAQ stock exchange (NASDAQ Global Market) under the symbol “CNSI.” We were incorporated in the State of Delaware in November 1997. Our principal executive offices are located at 200 Quannapowitt Parkway Wakefield, MA 01880 and our telephone number at that location is (781) 246-9000.
Our Internet address is www.comverse.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report. We make available, free of charge, on our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and

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amendments to such reports filed or furnished pursuant to Section 13(a), 14 or 15(d) of the Exchange Act, as soon as reasonably practicable after we have electronically filed such material with, or furnished such material to, the SEC.

ITEM 1A.
RISK FACTORS
You should carefully consider the risks described below, in addition to other information contained in this Annual Report, including our consolidated and combined financial statements and related notes. If any of the risks described below actually occurs, our business, financial results, financial condition and stock price could be materially adversely affected.
Risk Relating to Our Business
We experienced a decline in product bookings during the fiscal year ended January 31, 2014 compared to the prior fiscal year. If product bookings do not increase, our revenue and profitability will likely be materially adversely affected and we may be required to implement certain measures to preserve or enhance our operating results and cash position.
We experienced a decline in product bookings in the fiscal year ended January 31, 2014, which continued an adverse business trend that began in 2008. Product bookings may continue to decrease in future periods. If product bookings do not increase, our revenue and profitability will likely be materially adversely affected and we may be required to implement further cost reduction measures and other initiatives to preserve and enhance our operating results and cash position. Any such measures may limit or hinder our ability to execute our strategy and achieve our objectives thereby adversely affecting our business. In addition, declines in customer activity may result in reduced revenue in future periods and may require us to record non-cash expenses relating to the impairment of goodwill and intangible assets, which may materially adversely affect our results of operations.
Our success depends on our ability to anticipate customer demand for new products and solutions and to generate revenue from new products and technologies that exceed any declines in revenue we may experience from the sale of traditional products and solutions. Our advanced offerings may not be widely adopted by our existing and potential customers and increases in sales of our advanced offerings, if any, may not exceed or fully offset potential declines in sales of traditional solutions.
As part of our strategy, we continue to offer existing BSS customers upgrades to our Comverse ONE converged billing solution and to aggressively pursue opportunities to market our BSS solutions, primarily Comverse ONE, to new customers. As a result, sales of BSS's traditional standalone prepaid and postpaid BSS solutions have declined and may continue to decline. In addition, BSS is currently experiencing a shift in product mix as the portion of sales of Comverse ONE continues to increase and the portion of sales of our traditional BSS solutions continues to decline.
In response to a rapidly evolving Digital Services market, Digital Services is engaged in the promotion of advanced offerings, such as visual voicemail, call management, IP messaging, a Service Enablement Middleware, Rich Communication Solutions (RCS), and Software as a Service (SaaS) cloud-based solutions, in addition to Digital Services' traditional solutions, such as voicemail, SMS and MMS. While we believe demand for advanced offerings may grow due to the increasing deployment of smartphones by wireless communication service providers, the implementation of a new services model poses challenges with respect to pricing and customer demand for and acceptance of new offerings.
It is unclear whether our advanced offerings will be widely adopted by existing and potential customers. Currently, we are unable to predict whether sales of advanced offerings will exceed or fully offset declines that we may experience in the sale of traditional solutions. If sales of advanced offerings do not increase or if increases in sales of advanced offerings do not exceed or fully offset any declines in sales of traditional solutions, due to adverse market trends, changes in consumer preferences or otherwise, our revenue, profitability and cash flows would likely be materially adversely affected.
Historically, we have derived a significant portion of our revenue from two major customers, and our revenue, profitability and cash flows could be materially adversely affected if we are unable to maintain or develop relationships with these customers, or if these customers reduce demand for our products.
Historically, we have derived a significant portion of our revenue from a limited number of customers. For the fiscal years ended January 31, 2014, 2013 and 2012, sales to two customers accounted for approximately 24%, 23% and 9% of our revenue, respectively. We intend to establish long-term relationships with existing customers and continue to expand our customer base. While we diligently seek to become less dependent on any single customer, it is likely that one or more customers will continue to contribute a significant portion of our revenue in any given year for the foreseeable future. The loss of one or more of our significant customers, or reduced demand from one or more of our significant customers, would result in an adverse effect on our revenue and profitability.


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Product bookings are difficult to predict as a result of a high percentage of product bookings typically generated late in the fiscal quarter and in the fiscal year, lengthy and variable sales cycles, and a focus on large customers and projects.
A high percentage of our product bookings has typically been generated late in fiscal quarters. In addition, based on historical industry spending patterns of communication service providers, we typically forecast our highest customer product booking level in our fourth fiscal quarter. This trend makes it difficult for us to forecast our annual product bookings and to implement effective measures to cover any shortfalls of prior fiscal quarters if product bookings for the fourth fiscal quarter fail to meet our expectations.
Furthermore, we continue to emphasize large capacity systems in our product development and marketing strategies. Contracts for BSS and Digital Services installations typically involve a lengthy, complex and highly competitive bidding and selection process, and our ability to obtain particular contracts is inherently difficult to predict. A delay, cancellation or postponement of significant orders may cause us to miss our projections, which may not be discernible until the end of a financial reporting period.
It is difficult for us to forecast the timing of orders because our customers often need a significant amount of time to evaluate products before purchasing them. The period between initial customer contact and a purchase by a customer may vary from a few weeks to more than a year. During the evaluation period, customers may defer or scale down proposed orders of products for various reasons, including:
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changes in budgets and purchasing priorities;
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reduced need to upgrade existing systems;
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deferrals in anticipation of enhancements or new products;
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introduction of products by competitors; and
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lower prices offered by competitors.
We have many significant customers and frequently receive multi-million dollar orders. The deferral or loss of one or more significant orders or customers, could materially and adversely affect our results of operations in future fiscal periods.
We base our current and future expense levels on internal operating plans and sales forecasts, and operating costs are, to a large extent, fixed. As a result, we may not be able to sufficiently reduce our operating costs in any period to compensate for an unexpected near-term shortfall in revenue.
Decline or weakness in the global economy may result in reduced information technology spending and reduced demand for our products and services.
As a global company with a presence in many countries throughout the world, our sales and profitability are impacted by general economic conditions, both in the United States and internationally. In recent years, the global economy experienced a weakness that has been marked by, among other adverse factors, lower levels of consumer and corporate confidence, decreased business investment and consumer spending, increased unemployment, reduced income and asset values in many areas, currency volatility and more limited availability of credit and access to capital. In addition, during the fiscal year ended January 31, 2012, the U.S. credit rating was downgraded and during the fiscal year ended January 31, 2014, certain European countries continued to experience an economic slow-down and certain APAC countries also experienced an economic slow-down. Financial instability in any Eurozone country could have a contagion effect on the region and contribute to the general instability and uncertainty in the European Union. Also, continuing uncertainty regarding the stability of the Eurozone could lead to significant long-term economic weakness and reduced economic growth in Europe, which could lead to a sustained strengthening of the U.S. dollar against the euro, adversely affecting the profitability of our European operations.
We derive a substantial portion of our revenue from CSPs. During the weakness in the global economy, many of our customers experienced significant declines in revenue and profitability and some customers were required to reduce excessive debt levels. In response to these challenges, many of our customers have implemented cost-cutting measures, including more closely managing their operating expenses and capital investment budgets. This resulted in reduced demand for our products, services and solutions, longer customer purchasing decisions and pricing pressures that adversely affected our revenue and profitability. More specifically, such adverse market conditions have had and could continue to have a negative impact on our business by reducing the number of contracts we are able to sign with new customers and the size of initial spending commitments, as well as decreasing the level of discretionary spending under contracts with existing customers. In addition, a slowdown in buying decisions of CSPs may affect our business by increasing the risks of credit or business failures of suppliers, customers or distributors, by customer requirements for extended payment terms, by delays and defaults in customer or distributor payments, and by price reductions instituted by competitors to retain or acquire market share. In response to these events we, similar to other companies, engaged in significant cost savings measures.
During the fiscal year ended January 31, 2014 the global economy experienced a modest recovery but was still subject to significant volatility and uncertainty. If the global economy continues to experience volatility and uncertainty or market

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conditions worsen, our existing and potential customers will likely reduce their spending, which, in turn, would reduce the demand for our products and services, and materially affect our business, including our revenue, profitability and cash flows. In addition, we would likely be required to again undertake significant cost-saving measures, which measures may negatively impact our ability to implement our strategies and obtain our objectives, particularly if we are not able to invest in our businesses as a result of a protracted economic downturn.
Conditions in the telecommunications industry have harmed and may continue to harm our business, including our revenue, profitability and cash flows.
We have experienced certain adverse conditions in the telecommunications industry, including the emergence of new, lower-cost competitors from emerging markets, continued pressure on both capital expenditure and operating budgets at CSPs due to reduced ARPU, the proliferation of alternative messaging applications and new over-the-top competitors to CSPs, the maturation of wireless services, the commoditization of some voice and SMS text message services, the increased dependence for growth on emerging markets with a lower average revenue per user and changes in the regulatory environment at times. These conditions have had, and could continue to have, a material adverse effect on our business, including our revenue, profitability and cash flows.
Restructuring initiatives to align operating costs and expenses with anticipated revenue could have an adverse impact on our product development, project deployment and the timely execution of our business strategy.
In recent years we have implemented certain initiatives to improve our cash position. In order to improve operating performance and cash flow from operations, we intend to continue to implement initiatives which we believe will enhance efficiency and result in significant reductions in costs and operating expenses, including realigning our cost structure to our current size and business environment by primarily reducing our selling, general and administrative expenses. We intend to continue to implement restructuring initiatives during the fiscal year ending January 31, 2015. While restructuring our operations is designed to improve operational efficiency and business performance, there is a risk that such restructuring could have an adverse impact on our product development, project deployment and the timely execution of our business strategy. In addition, there is no assurance that these initiatives will reduce costs and the costs to implement them may offset any savings for a period of time.
Our success depends on our ability to enhance our existing products and develop and market new products in response to rapidly changing technology in our industries.
The software and high technology industry is subject to rapid change. The introduction of new technologies and new alternatives for the delivery of services are having, and can be expected to continue to have, a profound effect on competitive conditions in the market and our success. We have executed strategies to capitalize on growth opportunities in new and emerging products and technologies to offset such pressures. While certain of these new products and technologies have proven to initially be successful, it is unclear whether they will be widely adopted by our customers and potential customers. Any increases in revenue from these new products and technologies may not, however, exceed any declines in revenue we may experience from the sale of traditional products and technologies and our revenue and profitability may be adversely affected.
Our success depends on our ability to correctly anticipate technological trends, to react quickly and effectively to such trends and to enhance our existing products accordingly. Our success also depends, in part, on the development and introduction of new products on a timely and cost-effective basis, the acceptance of these new products by customers and consumers, and the corresponding risks associated with the development, marketing and adoption of these new products. As a result, the life cycle of our products is difficult to estimate. New product offerings may not enter the market in a timely manner for their acceptance or may not properly integrate into existing platforms. The failure of new product offerings to be accepted by the market could have a material adverse effect on our business. Our revenue and profitability may be adversely affected in the event that our customers reduce our actual and planned expenditures to expand or replace equipment or if we delay and reduce the deployment of new products.
Changing industry and market conditions may dictate strategic decisions to restructure some business units and discontinue others. Discontinuing a business unit or a product line may require us to record accrued liabilities for restructuring expenses. These strategic decisions could result in changes to determinations regarding a product's useful life and the recoverability of the carrying basis of certain assets.
We must often establish and demonstrate the benefits of new and innovative products to customers.
Many of our new and innovative products are complex. In many cases, it is necessary for us to educate existing and potential customers about the benefits and value of such new and innovative products, with no assurance that the customer will ultimately purchase them. The need to educate our customers increases the difficulty and time necessary to complete

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transactions, makes it more difficult to efficiently deploy limited resources, and creates risk that we will have invested in an opportunity that ultimately does not come to fruition. If we are unable to establish and demonstrate to customers the benefits and value of our new and innovative products and convert these efforts into sales, our business, including our revenue, profitability and cash flows, will be adversely affected.
We are exposed to risks associated with the sale of large systems and large system installations.
We have historically derived a significant portion of our sales and operating profit from contracts for large system installations with major customers. We continue to emphasize large capacity systems in our product development and marketing strategies. Contracts for large capacity system installations typically involve a lengthy, complex and highly competitive bidding and selection process, and our ability to obtain particular contracts is inherently difficult to predict. The timing and scope of these opportunities and the pricing and margins associated with any eventual contract award are difficult to forecast, and may vary substantially from transaction to transaction. As a result, our future operating results may accordingly exhibit a high degree of volatility and may vary significantly from period to period. The degree of our dependence on large system orders, and the investment required to enable us to perform such orders, without assurance of continuing order flow from the same customers, increases the risk associated with our business. Furthermore, if our professional services employees do not provide installation services effectively and efficiently, our customers may not use our installation services or may stop using our software. This could adversely impact our revenue and harm our reputation.
We may incur significant fees, penalties and costs in respect of undetected defects, errors or operational problems in our complex products.
Our products are complex and involve sophisticated technology that performs critical functions to highly demanding standards. Our existing and future products may develop operational problems and we may incur fees and penalties in connection with such problems. In addition, when we introduce products to the market or as we release new versions of existing products, the products may contain undetected defects or errors. We may not discover such defects, errors or other operational problems until after products have been released and used by the customer. We may incur significant costs to correct undetected defects, errors or operational problems in our products, including product liability claims. In addition, defects or errors in products also may result in questions regarding the integrity of the products, which could cause adverse publicity and impair their market acceptance, resulting in lost future sales.
If our products fail to function as promised, we may be subject to claims for substantial damages. Courts may not enforce provisions in contracts that would limit our liabilities or otherwise protect us from liability for damages. Although we maintain general liability insurance coverage, including coverage for errors or omissions, this coverage may not continue to be available on reasonable terms or in sufficient amounts to cover claims against us. In addition, our insurers may disclaim coverage as to any future claim. If claims exceeding the available insurance coverage are successfully asserted against us, or our insurers impose premium increases, large deductibles or co-insurance requirements, our business, including our cash position and profitability, could be adversely affected.
We depend on a limited number of suppliers and manufacturers for certain components and are exposed to the risk that these suppliers and manufacturers will not be able to fill our orders on a timely basis and at the specifications we require.
We rely on a limited number of suppliers and manufacturers for specific components and third party software and may not be able to find alternate manufacturers or third party software providers that meet our requirements. Existing or alternative sources may not be available on favorable terms and conditions. Thus, if there is a shortage of supply for these components or third party software, we may experience an interruption in our product supply. These risks may increase because of the current financial downturn and our suppliers' limited ability to raise capital.
We depend on a significant number of third-party subcontractors for certain company functions. If we do not properly manage or supervise our subcontractors we may experience delays and quality issues and ultimately cost overruns and losses on projects.
We use third-party subcontractors primarily for certain delivery, research and development and general and administrative functions, primarily in India, Israel, China and the United States and as of January 31, 2014, we used approximately 1,000 independent subcontractors for such functions. We use subcontractors to help provide flexibility to our cost structure as well as provide expertise in certain areas where the hiring of some skills in certain geographies may be difficult to obtain. While we utilize a number of companies to supply subcontractors we do rely on a few for a large number of subcontractors. To the extent that we do not properly manage or supervise our subcontractors or where we cannot find an adequate number of qualified subcontractors we may experience delays and quality issues and ultimately cost overruns and losses on projects.

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Increased competition could force us to lower our prices or take other actions to differentiate our products and changes in the competitive environment in the telecommunications industry worldwide could seriously affect our business.
Our competitors may be able to develop more quickly or adapt faster to new or emerging technologies and changes in customer requirements, or devote greater resources to the development, promotion and sale of their products. Some of our competitors have, relative to us greater name recognition and significantly greater financial, technical, marketing, customer service, public relations, distribution and other resources. We also experience competition from significantly larger network providers who at times may be able to bundle BSS transformations and Digital services solutions with an overall network deployment project and as a result may put pressure on prices. Certain Asian competitors have cost structures and financing alternatives that allow them in certain locations to also put pressure on prices. In addition, our competitors that manufacture other network telecommunications equipment may derive a competitive advantage in selling systems to customers that are purchasing, or have previously purchased, other compatible network equipment from such manufacturers. Furthermore, due to competition and market trends we expect to provide some of our solutions as SaaS, which is expected to create further pricing pressures. In addition, some of our customers may in the future decide to develop their own solutions internally instead of purchasing them from us. Increased competition could force us to lower our prices or take other actions to differentiate our products.
In addition, the telecommunications industry in which we operate continues to undergo significant changes as a result of deregulation and privatization worldwide, reduced restrictions on competition in the industry and rapid and evolving technologies. The worldwide enhanced services industry is already highly competitive and we expect competition to intensify. In addition, as we enter new markets as a result of our own research and development efforts, acquisitions or changes in subscriber preferences, we are likely to encounter new competitors. Moreover, we face indirect competition from changing and evolving technology, which provides alternatives to our products and services. For example, the introduction of open access to web-based applications from wireless devices allows end users to utilize web-based services, such as Facebook, Facetime, Google, Whatsapp, Line or Skype, to access, among other things, IP communications free of charge rather than use similar services provided by CSPs. This may reduce demand and the price of our products and services.
Our compliance with telecommunications regulations and standards may be time-consuming, difficult and costly.
In order to maintain market acceptance, our products must continue to meet a significant number of regulations and standards. In the United States, our products must comply with various regulations defined by the Federal Communications Commission (or the FCC) and Underwriters Laboratories, as well as standards developed by the Internet Engineering Task Force, the 3rd Generation Partnership Project and other standards committees. Internationally, our products must comply with standards established by telecommunications authorities in various countries as well as with recommendations of the International Telecommunications Union. As these standards evolve and if new standards are implemented, we will be required to modify our products or develop and support new versions of our products, and this may negatively affect the sales of our products and increase our costs. The failure of our products to comply, or delays in compliance, with the various existing and evolving industry standards could prevent or delay introduction of our products, which could harm our business.
Government regulatory policies are likely to continue to have an impact on product development costs and project spending costs and accordingly, on the pricing of existing as well as new public network services and, therefore, are expected to affect demand for such services and the communications products, including our products, which support these services. Tariff rates, the rates charged by service providers to their customers, whether determined by service providers or in response to regulatory directives, may affect the cost effectiveness of deploying and promoting certain public network services. Tariff policies are under continuous review and are subject to change. Future changes in tariffs by regulatory agencies or the application of tariff requirements to additional services could adversely affect the sales of our products to certain customers.
There may be future changes in U.S. and international telecommunications regulations that could slow the expansion of the service providers' network infrastructure and materially adversely affect our business. User uncertainty regarding future policies may also affect demand for communications products, including our products. In addition, the convergence of circuit and packet networks could be subject to governmental regulation. Currently, few laws or regulations apply to the Internet and to matters such as voice over the Internet. Regulatory initiatives in this area could decrease demand for our products and increase the cost of our products, thereby adversely affecting our business.
Environmental and other related laws and regulations subject us to a number of risks and could result in significant liabilities and costs.
Our operations are subject to certain foreign, federal, state and local regulatory requirements relating to environmental, waste management, labor and health and safety matters, including disclosure of the use of certain “conflict minerals.” Management believes that our business is operated in material compliance with all such regulations. However, violations may occur in the future as a result of human error, equipment failure or other causes, and any violation of these laws can subject us

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to significant liability, including fines, penalties and possible prohibition of sales of our products into one or more states or countries and result in a material adverse effect on our financial condition or results of operations.
Beginning in May 2014, we must comply with rules adopted by the SEC pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act that require disclosure of the use of conflict minerals that are mined from the Democratic Republic of Congo and adjoining countries. We have incurred and expect to continue to incur costs associated with complying with these disclosure requirements, including for conducting diligence procedures to determine the sources of conflict minerals that may be used or necessary to the production of our products and, if applicable, potential changes to products, processes or sources of supply as a consequence of such verification activities. In addition, these rules could adversely affect the sourcing, supply and pricing of materials used in our products, particularly if the number of suppliers offering the minerals identified as conflict minerals sourced from locations other than the Democratic Republic of Congo and adjoining countries is limited.
To date, the cost of compliance with such laws and regulations has not had a material impact on our expenditures, earnings or competitive position or that of our subsidiaries. Furthermore, we cannot predict the nature, scope or effect of environmental legislation or regulatory requirements that could be imposed or how existing or future laws or regulations will be administered or interpreted. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of regulatory agencies, could require substantial expenditures by us and could have a material impact on our business, financial condition and results of operations.
Failure or delay by us to achieve interoperability of our products with the systems of our customers could impair our ability to sell our products.
In order to penetrate new target markets, it is important that we ensure the interoperability of our products with the operations, administration, maintenance and provisioning systems used by our customers. Failure or delay in achieving such interoperability could impair our ability to sell products to some segments of the communications market and would adversely affect our business, including our revenue, profitability and cash flows.
Many of our sales are made by competitive bid or other competitive process which often require us to expend significant resources with no guaranty of recoupment.
Many of our sales, particularly in larger installations, are made by competitive bid or other competitive process. Successfully competing in competitive bidding situations subjects us to risks associated with:
•
the frequent need to bid on programs in advance of the completion of our design, which may result in unforeseen technological difficulties and cost overruns;
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incurring research and development expenses to improve or refine products in advance of winning the bid; and
•
the substantial time, money, and effort, including design, development, and marketing activities, required to prepare bids and proposals for contracts that may not be awarded to us.
If we do not ultimately win a bid, we may obtain little or no benefit from these expenditures and may not be able to recoup them on future projects.
Even where we are not involved in a competitive bidding process, due to the intense competition in our markets and increasing customer demand for shorter delivery periods, we must, in some cases, begin implementation of a project before the corresponding order has been finalized, increasing the risk that we will have to write off expenses associated with pursuing opportunities that ultimately do not come to fruition.
In addition, we sell certain products as components in large bids submitted by third parties, including systems integrators. These third parties may not be able to win these bids for reasons unrelated to our products. Accordingly, we may lose potential business, which may be significant, for reasons beyond our control.
Third parties may infringe upon our proprietary technology and we may infringe on the intellectual property rights of others.
We rely on a combination of patent, copyright, trade secret and trademark law and contractual non-disclosure and other provisions to protect our technology. These measures may not be sufficient to protect proprietary rights, and third parties may misappropriate our technologies and use for their own benefit. Also, most of these protections do not preclude competitors from independently developing products with functionality or features substantially equivalent or superior to our software. Any failure to protect our intellectual property could have a material adverse effect on our business.
While we regularly file patent applications, patents may not be issued on the basis of such applications and, if such patents are issued, they may not be sufficient to protect our technologies. In addition, any patents issued to us may be challenged, invalidated or circumvented. Despite our efforts to protect our intellectual property and proprietary rights,

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unauthorized parties may attempt to copy or otherwise obtain and use our products or technologies. Effectively policing the unauthorized use of our products is time-consuming and costly, and the steps taken by us may not prevent misappropriation of our technologies, particularly in foreign countries where in many instances the local laws or legal systems do not offer the same level of protection as in the United States.
If others claim that certain of our products infringe their intellectual property rights, we may be forced to seek expensive licenses, reengineer our products, engage in expensive and time-consuming litigation or stop marketing those products. We have been party to patent litigations. We attempt to avoid infringing known proprietary rights of third parties in our product development efforts. There are many issued patents as well as patent applications in the fields in which we are engaged. Because patent applications in the United States are not publicly disclosed until published or issued, applications may have been filed which relate to our software and products. If we were to discover that our products violated or potentially violated third party proprietary rights, we might not be able to continue offering these products without obtaining licenses for those products or without substantial reengineering of the products. Any reengineering effort may not be successful and such licenses may not be available. Even if such licenses were available, they may not be offered to us on commercially reasonable terms.
Substantial litigation regarding intellectual property rights exists in technology related industries, and our products may be increasingly subject to third party infringement claims as the number of competitors in our industry segments grows and the functionality of software products in different industry segments overlaps. In addition, we agreed to indemnify certain customers in certain situations should it be determined that our products infringe on the proprietary rights of third parties. Any third party infringement claims could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product and service delays or may require us to enter into royalty or licensing agreements. Any royalty or licensing arrangements, if required, may not be available on terms acceptable to us, if at all. A successful claim of infringement against us and our failure or inability to license the infringed or similar technology could have a material adverse effect on our business, including profitability and cash flows.
Use of free or open source software could expose our products to unintended restrictions and could materially adversely affect our business.
Some of our products contain free or open source software, referred to collectively as “open source software,” and we anticipate we will make additional use of open source software in the future. Open source software is generally covered by license agreements that permit the user to use, copy, modify and distribute the software without cost, provided that the users and modifiers abide by certain licensing requirements. Although we monitor the use of open source software in our product development in an effort to ensure compliance with these licensing requirements, any failure to comply with our obligations under open source software licenses may expose our products to unfavorable licensing restrictions or other requirements, which could have a material adverse effect on our business. Furthermore, the original developers of open source software generally provide no warranties on such software, which exposes us to greater risk than third-party commercial software.
Certain contractual obligations could expose us to uncapped or other significant liabilities.
Certain contract provisions, principally confidentiality and indemnification obligations in certain of our license agreements, could expose us to risks of significant loss that, in some cases, are not limited by contract to a specified maximum amount. Even where we are able to negotiate limitation of liability provisions, these provisions may not always be enforced depending on the facts and circumstances of the case at hand. If we or our products fail to perform to the standards required by our contracts, we could be subject to uncapped or other significant liability for which we may or may not have adequate insurance and our business, financial condition and results of operations, including cash position and profitability, could be materially adversely affected.
We have pursued and may continue to pursue mergers and acquisitions and strategic investments that present risks and may not be successful.
We have made acquisitions in the past and continue to examine opportunities for growth through mergers and acquisitions. Mergers and acquisitions entail a number of risks including:
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the impact of the assumption of known potential liabilities or unknown liabilities associated with the merged or acquired companies;
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financing the acquisition through the use of cash reserves, the incurrence of debt or the issuance of equity securities, which may be dilutive to our existing stockholders;
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the difficulty of assimilating the operations, personnel and customers of the acquired companies into our operations and business;
•
the potential disruption of our ongoing business and distraction of management;

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•
the difficulty of integrating acquired technology and rights into our services and unanticipated expenses related to such integration;
•
the difficulty of achieving the anticipated synergies from the combined businesses, including marketing, product integration, sales and distribution, product development and other synergies;
•
the failure to successfully develop acquired technology, resulting in the impairment of amounts capitalized as intangible assets at the date of the acquisition;
•
the potential for patent, trademark and other intellectual property infringement claims against the acquired company;
•
the impairment of relationships with customers and partners of the acquired companies or our customers and partners as a result of the integration of acquired operations;
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the impairment of relationships with employees of the acquired companies or our employees as a result of integration of new management personnel;
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the difficulty of integrating the acquired company's accounting, management information, human resources and other administrative systems into existing administrative, financial and managerial controls, reporting systems and procedures, particularly in the case of large acquisitions;
•
the need to implement required controls, procedures and policies at private companies which, prior to acquisition, lacked such controls, procedures and policies;
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in the case of foreign acquisitions, uncertainty regarding the impact of foreign laws and regulations, currency risks and the particular economic, political and regulatory risks associated with specific countries and the difficulty integrating operations and systems as a result of language, cultural, systems and operational differences;
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the potential inheritance of the acquired companies' past financial statements with their associated risks; and
•
the potential need to write-down impaired goodwill associated with any such transaction in subsequent periods, resulting in expenses to operations.
We continue to make significant investments in our business and to examine opportunities for growth. These activities may involve significant expenditures and obligations that cannot readily be curtailed or reduced if anticipated demand for the associated products does not materialize or is delayed. The impact of these decisions on future financial results cannot be predicted with assurance, and our commitment to growth may increase our vulnerability to downturns in our markets, technology changes and shifts in competitive conditions.
We are dependent upon hiring and retaining highly qualified employees.
We believe that our future success depends in large part on our continued ability to hire, train, develop, motivate and retain highly qualified employees, including sales, technical and managerial personnel. Competition for highly qualified employees in our industry is significant. We believe that there are only a limited number of individuals with the requisite skills to serve in many of our key positions and it is difficult to hire and retain those individuals. Failure to attract and retain highly qualified employees may have an adverse effect on our ability to develop new products and enhancements for existing products and to successfully market and sell those products.
Environmental and other disasters may adversely impact our business.
Environmental and other disasters, such as flooding, earthquakes, volcanic eruptions or nuclear or other disasters, or a combination thereof, may negatively impact our business. Environmental and other disasters may cause disruption to our operations in the regions impacted by such disasters and impede our ability to sell our solutions and services. In addition, customers located in countries or regions impacted by environmental and other disasters, may decide to suspend or discontinue projects. The occurrence of any environmental and/or other material disasters may have an adverse impact on our business in the future.
Risks Relating to International Operations
Geopolitical, economic and military conditions in countries in which we operate may adversely affect us.
Geopolitical, economic and military conditions could directly affect our operations. Recent turmoil in the geopolitical environment in many parts of the world, including terrorist activities, military actions or political unrest in countries in which we operate and the nationalization of privately-owned telecommunications companies, may cause disruptions to our business. To the extent that geopolitical and military conditions result in delays or cancellations of customer orders, or the manufacture or

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shipment of our products, our business, including revenue, profitability and cash flows, would likely be materially adversely affected. In addition, if these events result in restrictions on travel or unsafe travel conditions, our ability to service our existing clients and secure new business from potential new clients would likely be adversely affected.
Sanctions by the U.S. government against certain companies and individuals in Russia and Ukraine may hinder our ability to conduct business with potential or existing customers and vendors in these countries.
We currently derive a portion (less than 10% in fiscal 2013) of our revenue from Russia and Ukraine and conduct operations in both countries.  Recently, the U.S. government imposed sanctions through several executive orders restricting U.S. companies from conducting business with specified Russian and Ukrainian individuals and companies. While we believe that the executive orders currently do not preclude us from conducting business with our current customers in Russia and Ukraine, the sanctions imposed by the U.S. government may be expanded in the future to restrict us from engaging with them.  If we are unable to conduct business with new or existing customers or pursue opportunities in Russia or Ukraine, our business, including revenue, profitability and cash flows, could be materially adversely affected.  In addition, we are currently evaluating the impact of the executive orders on our relationships with vendors.  If we are unable to conduct business with certain vendors, our operations in Russia and the Ukraine could be materially adversely affected.
We derive a significant portion of our total revenue from customers outside the United States and have significant international operations, which subject us to risks inherent with foreign operations.
For the fiscal years ended January 31, 2014, 2013 and 2012, we derived approximately 73%, 78%, and 88% respectively, of our total revenue from customers outside of the United States. We maintain significant operations in Israel, France, the United Kingdom, Bulgaria, India and elsewhere throughout the world. Approximately 77% of our employees and approximately 73% of our facilities were located outside the United States as of January 31, 2014. Conducting business internationally exposes us to particular risks inherent in doing business in international markets, including, but not limited to:
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lack of acceptance of non-localized products;
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legal and cultural differences in the conduct of business;
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difficulties in hiring qualified foreign employees and staffing and managing foreign operations;
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longer payment cycles;
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difficulties in collecting accounts receivable and withholding taxes that limit the repatriation of cash;
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tariffs and trade conditions;
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currency exchange rate fluctuations;
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rapid and unforeseen changes in economic conditions in individual countries;
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increased costs resulting from lack of proximity to customers;
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difficulties in complying with varied legal and regulatory requirements across jurisdictions, including tax laws, labor laws, employee benefits, customs requirements and currency restrictions;
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different tax regimes and potentially adverse tax consequences of operating in foreign countries;
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immigration regulations that limit our ability to deploy our employees;
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difficulties in complying with applicable export laws and regulations requiring licensure or authorization to sell products;
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difficulties in repatriating cash held by our foreign subsidiaries on a tax efficient basis; and
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turbulence in foreign currency and credit markets.
One or more of these factors could have a material adverse effect on our international operations.
Our business in countries with a history of corruption and transactions with foreign governments, including with government owned or controlled CSPs, increase the risks associated with our international activities.
We are subject to the U.S. Foreign Corrupt Practices Act (or the FCPA) and other laws of the United States and other countries, including the UK Bribery Act 2010 (or the UK Bribery Act), that prohibit improper payments or offers of payments for the purpose of obtaining or retaining business. We have operations, deal with customers and make sales in countries known to experience corruption. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors that could be in violation of various U.S. and local laws, including the FCPA and the UK Bribery Act, even though these parties are not always subject to our control.

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We have implemented safeguards designed to eliminate improper practices by our employees, consultants, external sales agents and resellers. However, these safeguards and any future improvements may prove to be less than effective, and our employees, consultants, external sales agents or distributors may engage in the future in conduct for which we might be held responsible. Violations of the FCPA and other laws of the United States and other countries may result in significant civil and/or criminal penalties and other sanctions, which could have a material adverse effect on our business, financial condition and results of operations. In addition, violations of these laws, including the FCPA and the U.K. Bribery Act, may harm our reputation and deter governmental agencies and other existing or potential customers from buying our products and engaging our services.
Currency exchange rates, fluctuations of currency exchange rates and limitations imposed by certain countries on the outflow of their currencies could have a material adverse effect on our results of operations.
Although partially mitigated by our hedging activities, we are impacted by currency exchange rates and fluctuations thereof in a number of ways, including the fact that:
•
A significant portion of our expenses, principally salaries and related personnel expenses, are incurred in new Israeli shekels (or NIS), whereas the currency we use to report our financial results is the U.S. dollar and most of our revenue is generated in U.S. dollars. A significant strengthening of the NIS against the U.S. dollar can considerably increase the U.S. dollar value of our expenses in Israel, Should the NIS further strengthen in comparison to the U.S. dollar our results of operations will be adversely affected;
•
A portion of our international sales is denominated in currencies other than U.S. dollars, such as the euro, thereby exposing us to gains and losses on non-U.S. currency transactions;
•
A substantial portion of our international sales is denominated in U.S. dollars. Accordingly, devaluation in the local currencies of our customers relative to the U.S. dollar may impair the purchasing power of our customers and could cause customers to decrease or cancel orders or default on payment, which could harm our results of operations; and
•
We translate sales and other results denominated in foreign currency into U.S. dollars for our combined financial statements. During periods of a strengthening dollar, our reported international sales and earnings could be reduced because foreign currencies may translate into fewer dollars.
As noted above, from time to time, we enter into hedging transactions to attempt to limit the impact of foreign currency fluctuations. However, such hedging transactions may not prevent all exchange rate-related losses and risks. Therefore, our business and profitability may be harmed by such exchange rate fluctuations.
In the past 18 months there has been a significant strengthening of the NIS against the U.S. dollar. We have entered into hedging transaction to limit a portion of the impact of these foreign currency exchange rate fluctuations. However, our results of operations have been adversely affected during this prolonged period of the NIS strengthening against the U.S. dollar.
In addition, certain countries in which we operate, including Venezuela and Ukraine, limit the outflow of their currencies to purchase products from foreign companies thus limiting the ability of existing or potential customers to purchase our products. As a result, these practices may have a material adverse effect on our business, financial condition and results of operations, including revenue, profitability and cash flows.
Risks Relating to Operations in Israel
Conditions in Israel and the Middle East may materially adversely affect our operations and personnel and may limit our ability to produce and sell our products.
We have significant operations in Israel, including research and development, manufacturing, sales, and support. Approximately 36% of our employees and approximately 41% of our facilities were located in Israel as of January 31, 2014. Since the establishment of the State of Israel in 1948, a number of armed conflicts and terrorist acts have taken place, which in the past did, and in the future may, lead to security and economic problems for Israel. Israel has faced, and continues to face, difficult relations with the Palestinians and the risk of terrorist violence from both Palestinians and Hezbollah. In addition, tensions between Israel and Iran have intensified over Iran's continued pursuit of nuclear capabilities. Furthermore, certain countries in the Middle East adjacent to Israel, including Egypt and Syria, continue to experience political unrest and instability marked by civil demonstrations, military actions and violence, which in some cases resulted in the replacement of governments and regimes. Recent allegations of the use of chemical weapons by the Syrian regime and the threat of a military attack led by the United States on Syria could exacerbate regional instability and adversely affect Israel.  Current and future conflicts and political, economic and/or military conditions in Israel and the Middle East region may affect our operations in Israel. The exacerbation of violence within Israel or the outbreak of violent conflicts involving Israel may impede our ability to manufacture, sell, and support our products, engage in research and development, or otherwise adversely affect our business or operations. In addition, many of our employees in Israel are required to perform annual mandatory military service and are

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subject to being called to active duty at any time under emergency circumstances. The absence of these employees may have an adverse effect on our operations. Hostilities involving Israel that also result in the interruption or curtailment of trade between Israel and its trading partners could materially adversely affect our results of operations.
Certain research and development grants and tax benefits we receive in Israel may be reduced or eliminated in the future, and grants received may limit our ability to transfer know-how and manufacturing outside Israel.
We receive certain grants from the Government of Israel through the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of the State of Israel (or the OCS) for the financing of a portion of our research and development expenditures in Israel. The availability in any given year of these OCS grants depends on OCS approval of the projects and related budgets we submit to the OCS each year. In addition, in recent years, the Government of Israel has reduced the benefits available under these programs and these programs may be discontinued or curtailed in the future. The continued reduction in these benefits or the termination of our eligibility to receive these benefits may adversely affect our financial condition and results of operations.
Investment programs in manufacturing equipment and leasehold improvements at certain of our facilities in Israel have been granted approved enterprise status and we are therefore eligible for tax benefits under the Israeli Law for Encouragement of Capital Investments. The Government of Israel may reduce or eliminate the tax benefits available to approved enterprise programs such as the programs provided to us. These tax benefits may not continue in the future at their current levels or at all. If these tax benefits are reduced or eliminated, the amount of tax that we pay in Israel may increase. In addition, if we fail to comply with any of the conditions and requirements of the investment programs, the tax benefits we have received may be rescinded and we may be required to disgorge the amount of the tax benefit received, together with interest and penalties.
In addition, the OCS grants limit, to a certain extent, our ability to transfer certain technology, know-how and manufacturing of products outside Israel if such technology, know-how or products were developed using these grants. These limitations may impair our ability to outsource manufacturing, enter into strategic alliances or engage in similar arrangements for those technologies, know-how or products.
The ability of our Israeli subsidiaries to pay dividends is subject to limitations under Israeli law and dividends paid and loans extended by Israeli subsidiaries may be subject to taxes. If our Israeli subsidiaries were unable to pay dividends to us or extend us loans, or if such dividends or loans become subject to taxes, our liquidity may be materially adversely affected.
The ability of our Israeli subsidiaries to pay dividends is governed by Israeli law, which provides that dividends may be paid by an Israeli corporation only out of its earnings as defined in accordance with the Israeli Companies Law of 1999, provided that there is no reasonable concern that such payment will cause such subsidiary to fail to meet its current and expected liabilities as they come due. Cash dividends paid by an Israeli corporation to a United States resident corporate parent are subject to provisions of the Convention for the Avoidance of Double Taxation between Israel and the United States (referred to as the Convention). Under the terms of the Convention, such dividends are subject to taxation by both Israel and the United States, and, in the case of Israel, such dividends distributed out of income derived for a period for which an Israeli company is entitled to the reduced tax rate applicable to an approved enterprise are generally subject to withholding of Israeli income tax at source at a rate of 15%. In addition, in case the dividend is distributed out of tax exempted income (derived in a period in which a company was entitled to tax exempt income in accordance with the encouragement law), a company will be subject, in the tax year in which the dividend is distributed, to corporate tax on the grossed up transferred amounts, according to the corporate tax rate to which our income was subject under the approved enterprise program (10%). We or any of our U.S. subsidiaries would generally be subject to U.S. tax on receipt of any dividends from our Israeli subsidiaries (to the extent that those earnings have not already been subject to U.S. taxation), but would generally be entitled to claim a U.S. tax credit or deduction for the amount of any Israeli withholding tax or any Israeli income taxes paid by the subsidiary on the dividends distributed. In addition, adverse U.S. tax consequences may apply to loans or credit support arrangements extended by our Israeli subsidiaries to their U.S. shareholders, including us. If our Israeli subsidiaries were unable to pay dividends to us or extend us loans, or if such dividends or loans become subject to taxes, our liquidity may be materially adversely affected.
Risks Relating to our Operation as an Independent, Publicly-Traded Company
For as long as we are an emerging growth company, we will be exempt from certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.
In April 2012, President Obama signed into law the Jumpstart Our Business Startups Act, or the JOBS Act. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for emerging growth companies, including certain requirements relating to accounting standards and executive compensation disclosure. We are classified as an

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emerging growth company, which is defined as a company with annual gross revenues of less than $1 billion, that has been a public reporting company for a period of less than five years, and that does not have a public float of $700 million or more in securities held by non-affiliated holders. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, unless we elect not to take advantage of applicable JOBS Act provisions, we will not be required to (1) provide an auditor's attestation report on management's assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (2) comply with any new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies under Section 102(b)(1) of the JOBS Act, (3) comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor's report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (4) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, (5) provide certain disclosure regarding executive compensation required of larger public companies or (6) hold stockholder advisory votes on executive compensation. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.
As noted above, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies. We intend to take advantage of such extended transition period. Since we would then not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates. If we were to elect to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.
The cost of compliance or failure to comply with the Sarbanes-Oxley Act of 2002 may adversely affect our business.
As a new reporting company under the Securities and Exchange Act of 1934 (or the Exchange Act), we are subject to certain provisions of the Sarbanes-Oxley Act of 2002, which may result in higher compliance costs and may adversely affect our financial results. The Sarbanes-Oxley Act affects corporate governance, securities disclosure, compliance practices, internal audits, disclosure controls and procedures, financial reporting and accounting systems. Section 404 of the Sarbanes-Oxley Act, for example, requires companies subject to the reporting requirements of the U.S. securities laws to conduct a comprehensive evaluation of their internal control over financial reporting. We are required to provide our Section 404 evaluation beginning with this annual report on Form 10-K for the fiscal year ended January 31, 2014. The failure to comply with Section 404 may result in investors losing confidence in the reliability of our financial statements (which may result in a decrease in the trading price of our common stock), prevent us from providing the required financial information in a timely manner (which could materially and adversely impact our business, our financial condition, the trading price of our common stock and our ability to access capital markets, if necessary), prevent us from otherwise complying with the standards applicable to us as an independent, publicly-traded company and subject us to adverse regulatory consequences.
We may continue to incur significant expenses for professional fees in connection with the preparation of our periodic reports.
We have periodically engaged outside accounting consulting firms and other external consultants to assist our finance and accounting personnel in the preparation of financial statements and periodic reports and incurred significant expenses for their services. Although we expect these expenses to decline and be eliminated over time as we enhance our internal finance and accounting personnel to replace such external consultants and build these functions as an independent, publicly-traded company, we may in the near term incur significant expenses relating to professional fees in connection with the preparation of periodic reports, which may materially adversely affect our financial position and cash flows.
We agreed to indemnify CTI and its affiliates and following the completion of the Verint Merger are required to indemnify Verint against certain claims or losses that may arise in connection with the Verint Merger and the Share Distribution.
Under the Distribution Agreement we and CTI entered into in connection with the Share Distribution, we agreed to indemnify CTI and its affiliates and following the completion of the Verint Merger are required to indemnify Verint against certain losses that may arise as a result of the Verint Merger and the Share Distribution. Certain of our indemnification obligations are capped at $25.0 million and certain obligations are uncapped. Specifically, the capped indemnification obligations include indemnifying Verint against losses stemming from breaches by CTI of representations, warranties and covenants in the Verint Merger Agreement and for any liabilities of CTI that were known by CTI but were not included on the net worth statement delivered at the closing of the Verint Merger. Our uncapped indemnification obligations include indemnifying Verint against liabilities relating to our business; claims by any shareholder or creditor of CTI related to the Share

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Distribution, the Verint Merger or related transactions or disclosure documents; certain claims made by employees or former employees of CTI and any claims made by employees and former employees of ours (including but not limited to the Israeli Optionholder suits discussed in note 24 to the consolidated and combined financial statements included in Item 15 of this Annual Report; any failure by us to perform under any of the agreements entered into in connection with the Share Distribution; claims related to CTI's ownership or operation of our company; claims related to the Starhome Disposition; certain retained liabilities of CTI that are not reflected on or reserved against on the net worth statement delivered by CTI at the closing of the Verint Merger; and claims arising out of the exercise of appraisal rights by a CTI shareholder in connection with the Share Distribution. CTI placed $25.0 million in escrow to support indemnification claims to the extent made against us by Verint and any cash balance remaining in such escrow fund 18 months after the closing of the Verint Merger, less any claims made on or prior to such date, will be released to us. To the extent that we are required to make payments to satisfy these indemnification obligations, such payments could be significant and could have a material adverse effect on our financial condition, liquidity and results of operations.
Future changes in stock ownership could limit our use of net operating loss carryforwards.
As of January 31, 2014, we had net operating loss carryforwards of approximately $459.8 million available to offset future federal taxable income. Similarly, we had net operating loss carryforwards to offset state taxable income in varying amounts. As a result of changes in stock ownership that may take place in the future, there may be limitations on our ability to use net operating loss carryforwards. Limitations on our ability to use net operating loss carryforwards to offset future taxable income could reduce the benefit of our net operating loss carryforwards by requiring us, as applicable, to pay federal and state income taxes earlier than otherwise would be required, and causing part of our net operating loss carryforwards to expire without having been fully utilized. These various limitations resulting from an ownership change could have a material adverse effect on our cash flow and results of operations. We cannot predict the extent to which our net operating loss carryforwards will be limited or the ultimate impact of other limitations that may be caused by future changes in stock ownership, which will depend on various factors.
We may have significant liabilities for taxes of the CTI consolidated group for periods ending on or before the Share Distribution date, and may have an indemnity obligation to CTI for any tax on the Share Distribution.
We and our controlled domestic subsidiaries were members of CTI's consolidated group for U.S. federal income tax purposes. The Share Distribution was a taxable transaction and resulted in our deconsolidation from the CTI consolidated group. U.S. federal income tax law provides that each member of a consolidated group is jointly and severally liable for the consolidated group's entire federal income tax liability for periods when they are members of the same group. Similar principles may apply for foreign, state or local tax purposes where CTI had previously filed or may be determined to have been required to file combined, consolidated or unitary returns with us or our subsidiaries for foreign, state or local tax purposes. In addition, as part of the Share Distribution, we have entered into a Tax Disaffiliation Agreement with CTI, which sets out each party's rights and obligations with respect to deficiencies and refunds, if any, of federal, state, local or foreign taxes for periods before and after the Distribution and related matters such as the filing of tax returns and the conduct of IRS and other audits. Pursuant to the Tax Disaffiliation Agreement, we are required to indemnify CTI for losses and tax liabilities of the CTI consolidated group for periods (or portions thereof) ending at or before the end of the day on the Share Distribution date. Also, since the Share Distribution was a taxable transaction, CTI will be treated as if it had sold the stock of our Company in a taxable sale for its fair market value, and pursuant to the Tax Disaffiliation Agreement we are required to indemnify CTI for any tax on the Share Distribution. Since we are required to indemnify CTI under any circumstance set forth in the Tax Disaffiliation Agreement, we may be subject to substantial liabilities, which could have a material negative effect on our business, results of operations and cash flows.
The Share Distribution may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws and legal dividend requirements.
The Share Distribution is subject to review under various state and federal fraudulent conveyance laws. Fraudulent conveyance laws generally provide that an entity engages in a constructive fraudulent conveyance when (1) the entity transfers assets and does not receive fair consideration or reasonably equivalent value in return, and (2) the entity (a) is insolvent at the time of the transfer or is rendered insolvent by the transfer, (b) has unreasonably small capital with which to carry on its business, or (c) intends to incur or believes it will incur debts beyond its ability to repay its debts as they mature. An unpaid creditor or an entity acting on behalf of a creditor (including without limitation a trustee or debtor-in-possession in a bankruptcy by us or CTI or any of our respective subsidiaries) may bring an action alleging that the Share Distribution or any of the related transactions constituted a constructive fraudulent conveyance. If a court accepts these allegations, it could impose a number of remedies, including without limitation, voiding our claims against CTI, requiring our stockholders to return to CTI some or all of the shares of our common stock issued in the Share Distribution, or providing CTI with a claim for money damages against

22

us in an amount equal to the difference between the consideration received by CTI and the fair market value of our company at the time of the Share Distribution.
The measure of insolvency for purposes of the fraudulent conveyance laws will vary depending on which jurisdiction's law is applied. Generally, an entity would be considered insolvent if (1) the present fair saleable value of its assets is less than the amount of its liabilities (including contingent liabilities); (2) the present fair saleable value of its assets is less than its probable liabilities on its debts as such debts become absolute and matured; (3) it cannot pay its debts and other liabilities (including contingent liabilities and other commitments) as they mature; or (4) it has unreasonably small capital for the business in which it is engaged. We cannot assure you what standard a court would apply to determine insolvency or that a court would determine that we, CTI or any of our respective subsidiaries were solvent at the time of or after giving effect to the Share Distribution.
Prior to the Share Distribution, the CTI Board expected that we and CTI would each be solvent and adequately capitalized after the Share Distribution, would be able to repay our respective debts and obligations as they mature following the Share Distribution and would have sufficient capital to carry on our respective businesses. In addition, it was a condition to the Share Distribution that the CTI Board receive an opinion with respect to the capital adequacy of us and CTI as separate companies following the Share Distribution from a nationally recognized provider of such opinions. The CTI Board's expectations concerning our and CTI's post Share Distribution capital adequacy were based on a number of assumptions, including its expectation of the post Share Distribution operating performance and cash flow of each of our company and CTI and its analysis of the post Share Distribution assets and liabilities of each company, including expected working capital and lack of significant amount of indebtedness at our company. We cannot assure you, however, that a court would reach the same conclusions in determining whether CTI or we were insolvent at the time of, or after giving effect to, the Share Distribution.
Risks Relating to Our Common Stock
Our stock price may fluctuate significantly in the future, which may make it difficult for stockholders to resell shares of common stock at times or prices that they find attractive.
The price of our common stock on Nasdaq constantly changes, and has increased since the Share Distribution. We expect that the market price of our common stock will continue to fluctuate, depending upon many factors, some of which may be beyond our control, including:
•
changes in expectations concerning our future financial performance and the future performance of the communication industry in general, including financial estimates and recommendations by securities analysts;
•
differences between our actual financial and operating results and those expected by investors and analysts;
•strategic moves by us or our competitors, such as acquisitions or restructurings;
•changes in the regulatory framework affecting our international operations; and
•changes in general economic or market conditions.
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.
Substantial sales of shares of our common stock could cause our stock price to decline.
All of our outstanding shares may be sold immediately in the public market. The sales of significant amounts of our common stock or the perception in the market that this will occur may result in the lowering of the market price of our common stock.
Holders of our common stock may be adversely affected through dilution.
We may need to issue equity in order to fund working capital, capital expenditures and product development requirements or to make acquisitions and other investments. If we choose to raise funds through the issuance of common equity, the issuance will dilute your ownership interest.
We cannot assure you that we will pay any dividends.
We do not currently plan to pay any dividends. We cannot assure you that we will pay any dividends in the future, continue to pay any dividends if we do commence the payment of dividends, or that if we do decide to pay dividends, what the

23

amount of dividends will be or that we will have sufficient surplus under Delaware law to be able to pay any dividends. This may result from extraordinary cash expenses, actual expenses exceeding contemplated costs, funding of capital expenditures, or increases in reserves. If we do not pay dividends, the price of our common stock that you receive in the Share Distribution must appreciate for you to receive a gain on your investment in us. This appreciation may not occur.
Anti-takeover provisions in our organizational documents and Delaware law could delay or prevent a change in control.
Anti-takeover provisions of our charter, bylaws, and the Delaware General Corporation Law, or DGCL, may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable and diminish the opportunity for stockholders to participate in acquisition proposals at a price above the then-current market price of our common stock. For example, our charter and bylaws authorize our Board, without further stockholder approval, to issue one or more classes or series of preferred stock and fix the powers, preferences, rights, and limitations of such class or series, which could adversely affect the voting power of your shares. In addition, our bylaws provide for an advance notice procedure for nomination of candidates to our Board that could have the effect of delaying, deterring, or preventing a change in control. Further, as a Delaware corporation, we are subject to provisions of the DGCL regarding “business combinations,” which can deter attempted takeovers in certain situations. We may, in the future, consider adopting additional anti-takeover measures. The authority of our Board to issue undesignated preferred or other capital stock and the anti-takeover provisions of the DGCL, as well as other current and any future anti-takeover measures adopted by us, may, in certain circumstances, delay, deter, or prevent takeover attempts and other changes in control of the Company not approved by our Board.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
We lease office space and manufacturing and storage facilities for our operations worldwide. We also have leases for our various sales offices worldwide. The following table presents, as of January 31, 2014, the country location and size (expressed in square feet) of the facilities leased by us:
 
 
Total
Israel
272,962

United States
181,377

United Kingdom
37,599

France
27,954

Bulgaria
26,479

India
23,336

Italy
11,108

Australia
10,471

Japan
9,964

Singapore
9,623

Russia
7,867

Canada(1)
7,169

Brazil
5,971

Germany
5,883

Other(2)
33,285

Total
671,048

(1) Our Canadian facilities are used by Digital Services and All Other.
(2) All of our other facilities are used by BSS, Digital Services and All Other.
For the fiscal year ended January 31, 2014, the aggregate base annual rent for the facilities under lease, net of sub-lease income, was approximately $17.4 million, and such leases may be subject to various pass-throughs and escalation adjustments. For more detailed information about our leases, see note 23 to the consolidated financial statements included in Item 15 of this Annual Report.

24

In May 2012, we entered into an agreement for the lease of a facility in Ra'anana, Israel that is intended to replace our existing office space in Tel Aviv, Israel. The lease includes an option to waive up to 30% of the building subject to a penalty. During the fiscal year ended January 31, 2014, we exercised this option and returned 27% of the building. The term of the lease is for ten years, expected to commence in October 2014. In addition, we have the right to extend the term of the lease by up to five years. The annual base rent under the agreement, after partial return of office space, for approximately 218,912 square feet is $4.5 million. We expect that this facility will be used by BSS and Digital Services and the other operations included in All Other.
In connection with the 2012 restructuring initiative, certain office space, including offices in New York, New York and a partial return of office space in Ra'anana, Israel, have been vacated or consolidated upon expiration of leases. We will continue to evaluate our existing lease commitments and reduce or expand space as warranted.
ITEM 3.
LEGAL PROCEEDINGS
Israeli Optionholder Class Action
CTI and certain of its former subsidiaries, including Comverse Ltd. (a subsidiary of ours), were named as defendants in four potential class action litigations in the State of Israel involving claims to recover damages incurred as a result of purported negligence or breach of contract due to previously-settled allegations regarding illegal backdating of CTI options that allegedly prevented certain current or former employees from exercising certain stock options. We intend to vigorously defend these actions.
Two cases were filed in the Tel Aviv District Court against CTI on March 26, 2009, by plaintiffs Katriel (a former Comverse Ltd. employee) and Deutsch (a former Verint Systems Ltd. employee). The Katriel case (Case Number 1334/09) and the Deutsch case (Case Number 1335/09) both seek to approve class actions to recover damages that are claimed to have been incurred as a result of CTI's negligence in reporting and filing its financial statements, which allegedly prevented the exercise of certain stock options by certain employees and former employees. By stipulation of the parties, on September 30, 2009, the court ordered that these cases, including all claims against CTI in Israel and the motion to approve the class action, be stayed until resolution of the actions pending in the United States regarding stock option accounting, without prejudice to the parties' ability to investigate and assert the unique facts, claims and defenses in these cases. On May 7, 2012, the court lifted the stay, and the plaintiffs have filed an amended complaint and motion to certify a class of plaintiffs in a single consolidated class action. The defendants responded to this amended complaint on November 11, 2012, and the plaintiffs filed a further reply on December 20, 2012. A pre-trial hearing for the case was held on December 25, 2012, during which all parties agreed to attempt to settle the dispute through mediation. The mediation process is currently ongoing.
Separately, on July 13, 2012, plaintiffs filed a motion seeking an order that CTI hold back $150 million in assets as a reserve to satisfy any potential damage awards that may be awarded in this case, but did not seek to enjoin the Share Distribution. We do not believe that the motion has merit. On July 25, 2012, the court indicated that it will not rule on the motion until after it rules on plaintiffs' motion to certify a class of plaintiffs. On August 16, 2012, plaintiffs filed a motion for leave to appeal the court's order to the Israeli Supreme Court and on November 11, 2012, CTI responded to plaintiff's motion. The parties are awaiting a decision.
Two cases were also filed in the Tel Aviv Labor Court by plaintiffs Katriel and Deutsch, and both sought to approve class actions to recover damages that are claimed to have been incurred as a result of breached employment contracts, which allegedly prevented the exercise by certain employees and former employees of certain CTI and Verint stock options, respectively. The Katriel litigation (Case Number 3444/09) was filed on March 16, 2009, against Comverse Ltd., and the Deutsch litigation (Case Number 4186/09) was filed on March 26, 2009, against Verint Systems Ltd. The Tel Aviv Labor Court has ruled that it lacks jurisdiction, and both cases have been transferred to the Tel Aviv District Court. These cases have been consolidated with the Tel Aviv District Court cases discussed above.
An additional case has been filed by an individual plaintiff similarly seeking to recover damages up to an aggregate of $3.3 million allegedly incurred as a result of the inability to exercise certain stock options. The case generally alleges the same causes of actions alleged in the potential class action discussed above.
On February 4, 2013, Verint and CTI completed the Verint Merger. As a result of the Verint Merger, Verint assumed certain rights and liabilities of CTI, including any liability of CTI arising out of the actions discussed above. However, under the terms of the Distribution Agreement between CTI and us relating to the Share Distribution, Verint, as successor to CTI, is entitled to indemnification from us for any losses it suffers in its capacity as successor-in-interest to CTI in connection with these actions.

25

Other Legal Proceedings
From time to time, we and our subsidiaries are subject to claims in legal proceedings arising in the normal course of business. We do not believe that we or our subsidiaries are currently party to any pending legal action not described herein or disclosed in our consolidated and combined financial statements that could reasonably be expected to have a material adverse effect on our business, financial condition or results of operations.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASEES OF EQUITY SECURITIES
Listing on the NASDAQ Global Market
The following table sets forth the high and low intra-day sales prices of our common stock, as reported by NASDAQ for the period of October 24, 2012 (our first day of public market trading) through January 31, 2014:
Fiscal Year
 
Fiscal Quarter
 
Low
 
High
2013
 
11/1/2013 –1/31/2014
 
$
30.58

 
$
40.30

 
 
8/1/2013 –10/31/2013
 
$
29.41

 
$
32.34

 
 
5/1/2013 –7/31/2013
 
$
26.56

 
$
32.37

 
 
2/1/2013 –4/30/2013
 
$
25.08

 
$
29.50

2012
 
11/1/2012 –1/31/2013
 
$
26.25

 
$
31.50

 
 
10/24/2012 –10/31/2012
 
$
28.00

 
$
30.65

As of April 2, 2014, the last practicable date, the last reported sale price of our common stock was $35.79 per share and there were approximately 3,575 holders of record of our common stock. Such record holders include a number of holders who are nominees for an undetermined number of beneficial owners.
Dividend Policy
We have not declared or paid any cash dividends on our equity securities and currently do not expect to pay any cash dividends in the near future. Any future determination as to the declaration and payment of dividends will be made by our Board of Directors, in its discretion, and will depend upon our earnings, financial condition, capital requirements and other relevant factors.
Securities Authorized for Issuance Under Equity Compensation Plans
For a discussion related to securities authorized for issuance under equity compensation plans, see Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters—Equity Compensation Plan Information.”
Recent Sales of Unregistered Securities
None
Issuer Purchases of Equity Securities
In the fourth quarter of the fiscal year ended January 31, 2014, we purchased an aggregate of 4,428 shares of our common stock from certain of our directors, executive officers and employees to cover tax liabilities in connection with the delivery of shares in settlement of stock awards. The shares purchased by us are deposited in Comverse's treasury. These purchases were not made pursuant to a specific repurchase plan or program. The following table provides information regarding our purchases of our common stock in respect of each month during the fourth quarter of the fiscal year ended January 31, 2014 during which purchases occurred:

26

Period
 
Total Number of
Shares (or
Units)
Purchased
 
Average Price Paid Per 
Share (or Unit)
 
Total Number of
Shares (or Units)
Purchased as
Part of
Publicly
Announced
Plans or
Programs
 
Maximum 
Number
(or Approximate
Dollar Value) of
Shares (or Units)
That May Yet Be
Purchased 
Under the
Plans or Programs
November 1, 2013 – November 30, 2013
 
—

 
$
—

 
—

 
—

December 1, 2013 – December 31, 2013
 
4,428

 
$
38.57

 
—

 
—

January 1, 2014 – January 31, 2014
 
—

 
$
—

 
—

 
—

Total
 
4,428

 
$
38.57

 
—

 
—

Common Stock Repurchase

Our Board of Directors has adopted a program to repurchase from time to time at management’s discretion up to $30 million in shares of our common stock on the open market during the 18-month period ending October 9, 2015 at prevailing market prices. Repurchases will be made under the program using our own cash resources.
ITEM 6.
SELECTED FINANCIAL DATA
The following table presents selected consolidated and combined financial data as of and for the fiscal years ended January 31, 2014, 2013, 2012, 2011 and 2010. The selected consolidated and combined financial data as of January 31, 2014 and 2013 and for the fiscal years ended January 31, 2014, 2013 and 2012 were derived from the consolidated and combined financial statements included in Item 15 of this Annual Report. The selected combined financial data as of January 31, 2012 and 2011 and for the fiscal years ended January 31, 2011 and 2010 were derived from audited combined financial statements that are not included in this Annual Report. The selected combined financial data as of January 31, 2010 was derived from our unaudited combined financial statements which are not included in this Annual Report.
Our historical financial statements combine, on the basis of common control, the results of operations and financial position of Comverse, Inc. and its subsidiaries with Starhome and Exalink Ltd. CTI's interest in Starhome (66.5% of the outstanding share capital) and a former CTI wholly-owned subsidiary, Exalink Ltd. were contributed to us on September 19, 2012 and October 31, 2012, respectively. As a result of the Starhome Disposition on October 19, 2012, the results of operations of Starhome, including the gain on sale of Starhome, are included in discontinued operations, less applicable income taxes, as a separate component of net loss in our combined statements of operations for all periods presented and the assets and liabilities of Starhome are included as separate components in our combined balance sheets as of January 31, 2012, 2011 and 2010. See note 1 to the consolidated and combined financial statements included in Item 15 of this Annual Report. Our financial information reflects historical results and may not be indicative of our future performance.
The comparability of the selected consolidated and combined financial data as of and for the fiscal years ended January 31, 2014, 2013, 2012, 2011 and 2010 has been materially affected primarily by significant compliance-related professional fees and compliance-related compensation and other expenses recorded for the fiscal years ended January 2012, 2011and 2010 in connection with remediation of material weaknesses, evaluations of our revenue recognition practices and the preparation of our financial information as part of CTI's efforts to become current in periodic reporting obligations under the federal securities laws, the impairment of goodwill in the fiscal years ended January 31, 2013 and our adoption of accounting guidance relating to revenue recognition effective for fiscal periods commencing February 1, 2011. The selected consolidated and combined financial data presented should be read together with Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated and combined financial statements and the related notes included in Item 15 of this Annual Report.

27

 
 
Fiscal Years Ended January 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
(In thousands, except per share data)
Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
Total revenue (1)
 
$
652,501

 
$
677,763

 
$
771,157

 
$
862,836

 
$
794,787

Income (loss) from operations(2)(3)(4)
 
37,699

 
(2,192
)
 
11,442

 
(59,776
)
 
(214,216
)
Net income (loss) from continuing operations (5)
 
18,686

 
(20,294
)
 
(20,648
)
 
(92,741
)
 
(221,970
)
Income from discontinued operations, net of tax
 
—

 
26,542

 
7,761

 
2,826

 
3,049

Net Income (loss)
 
18,686

 
6,248

 
(12,887
)
 
(89,915
)
 
(218,921
)
Less: Net income attributable to noncontrolling interest
 
—

 
(1,167
)
 
(2,574
)
 
(1,030
)
 
(1,071
)
Net income (loss) attributable to Comverse, Inc.
 
18,686

 
5,081

 
(15,461
)
 
(90,945
)
 
(219,992
)
Earnings (loss) per share attributable to Comverse, Inc.’s stockholders:(6)
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.84

 
$
(0.93
)
 
$
(0.94
)
 
$
(4.23
)
 
$
(10.12
)
Discontinued operations
 
—

 
1.16

 
0.23

 
0.08

 
0.09

Basic earnings (loss) per share
 
$
0.84

 
$
0.23

 
$
(0.71
)
 
$
(4.15
)
 
$
(10.03
)
Diluted earnings (loss) per share
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.83

 
$
(0.93
)
 
$
(0.94
)
 
$
(4.23
)
 
$
(10.12
)
Discontinued operations
 
—

 
1.16

 
0.23

 
0.08

 
0.09

Diluted earnings (loss) per share
 
$
0.83

 
$
0.23

 
$
(0.71
)
 
$
(4.15
)
 
$
(10.03
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of January 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
(In thousands)
Consolidated Balance Sheet Data:
 
 
Total assets(7)(8)
 
$
748,837

 
$
857,790

 
$
902,947

 
$
1,048,446

 
$
1,313,717

Indebtedness, including current maturities (9)
 
—

 
—

 
8,536

 
13,019

 
—

(1)
Total revenue for the fiscal year ended January 31, 2012 includes an additional $48.9 million of revenue recognized as a result of the adoption of revenue recognition guidance issued by the Financial Accounting Standards Board (or the FASB) and effective for us for fiscal periods commencing February 1, 2011. See “Management's Discussion and Analysis of Financial Condition and Results of Operations-Executive Summary-Adoption of New Revenue Recognition Guidance.”
(2)
For the fiscal years ended January 31, 2014, 2013, 2012, 2011 and 2010, we recorded compliance-related professional fees of $2.1 million, $0.2 million, $10.9 million, $82.1 million and $113.3 million, respectively.
(3)
For the fiscal years ended January 31, 2014, 2013, 2012, 2011 and 2010, we recorded compliance-related compensation and other expenses of $0.2 million, $2.1 million, $6.7 million, $4.5 million, and $10.7 million, respectively.
(4)
Includes a $10.9 million VAT refund received in the fiscal year ended January 31, 2014.
(5)
Includes uncertain tax position net reversals of $16.5 million in the fiscal year ended January 31, 2014.
(6)
The computation of basic and diluted earnings (loss) per share for fiscal years ended January 31, 2012, 2011 and 2010 is calculated using the number of shares of our common stock outstanding on October 31, 2012, the completion date of the Share Distribution.
(7)
Excludes the balance sheet of Starhome as of January 31, 2014 and 2013 which was sold on October 19, 2012.
(8)
We have not declared any dividends during the fiscal years presented.

28

(9)
Includes borrowings outstanding under (i) a line of credit of $6.0 million as of January 31, 2011 and (ii) notes payable to CTI of $8.5 million and $7.0 million as of January 31, 2012 and 2011, respectively.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with Item 1, “Business,” Item 6, “Selected Financial Data,” and the consolidated and combined financial statements and related notes included in Item 15 of this Annual Report. This discussion and analysis contains forward-looking statements based on current expectations relating to future events and our future financial performance that involve risks and uncertainties. See “Forward-Looking Statements” on page i of this Annual Report. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under Item 1A, “Risk Factors,” and elsewhere in this Annual Report. Percentages and amounts within this section may not calculate due to rounding differences.
EXECUTIVE SUMMARY
Overview
We are a leading provider of telecom business enablement solutions for communication service providers (or CSPs) through a portfolio of product-based solutions and associated services in the following domains:
•
Business Support Systems. We provide converged, prepaid and postpaid billing and active customer management systems (or BSS) for wireless, wireline, cable and multi-play CSPs, delivering a value proposition designed to enable an effective service and data monetization, a consistent, enhanced customer experience, reduced complexity and cost, and real-time choice and control.
•
Policy Solutions. We provide CSPs with the ability to better manage their data networks and to better monetize their data network investment through our Policy Management and Policy Enforcement capabilities for wireless and wireline data networks.
•
Digital Services. We enable voice and messaging services (including voicemail, visual voicemail, call completion, short messaging service (or SMS), and multimedia picture and video messaging (or MMS)), and digital lifestyle services and Internet Protocol (or IP) based rich communication services (including group chat, file transfer, video share, social, presence and geo-location information).
•
Managed and Professional Services. We offer a portfolio of services related to our solutions following the completion of the delivery of the project to the customer (referred to as managed services).
Our reportable segments are:
•
BSS—comprised of the BSS operating segment; and
•
Digital Services—comprised of the Digital Services operating segment.
The results of operations of our global corporate functions that support our business units is included in the column captioned “All Other” as part of our business segment presentation. For additional information see note 20 to the consolidated and combined financial statements included in Item 15 of this Annual Report. Starhome’s results of operations are included in discontinued operations and therefore not presented in segment information.
Historically, Mobile Internet (or Comverse MI), which was renamed Policy and is responsible for our mobile Internet and policy products, and Netcentrex, an IP-based solution that provides carrier-hosted enterprise and consumer IP services, were included in All Other. Effective in the three months ended January 31, 2014 (fourth quarter of 2013), Comverse MI and Netcentrex have been combined with the Comverse BSS and Comverse VAS segments, respectively, to form our BSS and Digital Services segments. Accordingly, the results presented under segment reporting reflect the change in segment reporting for all periods presented to conform to the current period segment reporting structure. For more information, see note 1 to our consolidated and combined financial statements included in Item 15 of this Annual Report.
Significant Events
During the fiscal year ended January 31, 2014 and subsequent thereto, the following additional significant events occurred:
Merger of CTI and Verint. On August 12, 2012, CTI entered into an agreement and plan of merger (referred to as the Verint Merger Agreement) with Verint providing for the merger of CTI with and into a subsidiary of Verint to become a wholly-owned subsidiary of Verint (referred to as the Verint Merger). The Verint Merger was completed on February 4, 2013.

29

Under the Share Distribution Agreements we and CTI entered into in connection with the Share Distribution, we have agreed to indemnify CTI and its affiliates (including Verint after the Verint Merger) against certain losses that may arise as a result of the Verint Merger and the Share Distribution. Certain of our indemnification obligations are capped at $25.0 million and certain are uncapped. CTI placed $25.0 million in escrow to support indemnification claims to the extent made against us by Verint and any cash balance remaining in such escrow fund 18 months after the closing of the Verint Merger (referred to as Escrow Release Date), less any claims made on or prior to such date, will be released to us. The escrow funds cannot be used for claims related to the Israeli Optionholder suit. Although no indemnification claims have been filed and the Escrow Release Date is within 12 months of January 31, 2014, we continue to classify the restricted cash balance as "Long-term restricted cash" in the Consolidated Balance Sheets until it can be determined if any future claims would restrict the release of such escrow funds. We also assume all pre-Share Distribution tax obligations of each of us and CTI. For more information, see note 3 to our consolidated and combined financial statements included in Item 15 of this Annual Report.
Changes in Board Composition and Agreement with Becker Drapkin. On September 11, 2013, the Board appointed Neil Montefiore to serve as a director and as a member of the Board’s Audit Committee and Corporate Governance and Nominating Committee. There were no arrangements or understandings between Mr. Montefiore and any other persons pursuant to which he was selected as a director.
On March 12, 2014, we entered into an agreement (or the Agreement) with Matthew Drapkin, Becker Drapkin Management, L.P., and certain of their affiliates (or, collectively, the BD Group).
Under the terms of the Agreement, we agreed (a) on the date of the Agreement to (i) increase the size of the Board from seven to eight total directors; (ii) appoint Mr. Drapkin as a member of the Board; and (iii) appoint Mr. Drapkin as a member of the Compensation and Leadership Committee of the Board; (b) to nominate Mr. Drapkin for election or re-election to the Board at our 2014 and 2015 annual shareholders’ meetings, subject to the nonoccurrence of certain events described in the Agreement; and (c) for so long as Mr. Drapkin is a member of the Board, (i) that Mr. Drapkin shall be a member of the Compensation and Leadership Committee and (ii) to consider Mr. Drapkin, in good faith based on Mr. Drapkin’s relevant experience, for membership on any committee of the Board constituted to evaluate strategic opportunities or transactions.
If Mr. Drapkin is unable or unwilling to serve as a director, the BD Group and the Board (excluding Mr. Drapkin) shall agree on a replacement.
The Agreement also provides that the BD Group shall have certain obligations until the later of immediately following our 2016 shareholders’ meeting and 30 days after Mr. Drapkin ceases to be a member of the Board, or such earlier date, if any, on which the Company materially breaches certain provisions of the Agreement and such breach has not been cured within ten business days following written notice, provided the breach is curable (referred to as the Standstill Period).
During the Standstill Period, the BD Group has agreed to (a) cause all shares of our common stock beneficially owned by the BD Group to be present for quorum purposes at all shareholders’ meetings and to be voted in favor of all directors nominated by the Board for election and against the removal of any directors whose removal is not recommended by the Board, unless and until the Board does not recommend Mr. Drapkin for re-election at the our 2016 annual shareholders’ meeting; and (b) refrain from taking certain actions, including, subject to certain exceptions, to not (i) acquire beneficial ownership of more than 14.9% of our common stock; (ii) engage in activities to control or influence our governance or policies, including by submitting shareholder proposals, nominating candidates for election to the Board or opposing candidates nominated by the Board, attempting to call special meetings of our shareholders or soliciting proxies with respect to our voting securities; (iii) participate in any “group,” within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, with respect to our common stock; (iv) be involved with certain business combination or extraordinary transactions; (v) make certain unpermitted dispositions of the Company’s common stock; (vi) be involved with any litigation, arbitration or other proceeding against or involving us or our directors or officers while Mr. Drapkin is a director; or (vii) engage in any short sale or derivatives transaction that derives any significant part of its value from a decline in the market price or value of our securities. Mr. Drapkin has also agreed not to serve on the board of directors of a competitor of ours while serving as our director. Notwithstanding the above, if the Board does not recommend Mr. Drapkin for re-election at the 2016 annual shareholders’ meeting, the BD Group may nominate candidates for election to the Board and make public statements and solicit proxies in support of any such candidate’s nomination for election at the 2016 annual shareholders’ meeting.
In addition, the Agreement provides that Mr. Drapkin irrevocably tender his resignation as director effective as of the date that (a) the BD Group does not have beneficial ownership of (i) 5% or more of our outstanding common stock, disregarding issuances by us of equity securities and/or issuances primarily for cash consideration or the purpose of providing compensation to our executive officers, directors, employees or consultants, or (ii) after including such issuances, 3% or more of our outstanding common stock; or (b) the BD Group materially breaches certain provisions of

30

the Agreement and such breach has not been cured within ten business days following written notice, provided such breach is curable.
Consolidated and Combined Financial Highlights
The following table presents certain financial highlights for the fiscal years ended January 31, 2014, 2013 and 2012, including Comverse performance and Comverse performance margin (reflecting Comverse performance as a percentage of revenue), non-GAAP financial measures, for our company on a consolidated and combined basis:
 
Fiscal Years Ended January 31,
 
2014
 
2013
 
2012
 
(Dollars in thousands)
Total revenue
$
652,501

 
$
677,763

 
771,157

Gross margin
38.3
%
 
36.3
 %
 
39.2
%
Income (loss) from operations
37,699

 
(2,192
)
 
11,442

Operating margin
5.8
%
 
(0.3
)%
 
1.5
%
Net income (loss) from continuing operations
18,686

 
(20,294
)
 
(20,648
)
Income from discontinued operations, net of tax
—

 
26,542

 
7,761

Net income (loss)
18,686

 
6,248

 
(12,887
)
Less: Net income attributable to noncontrolling interest
—

 
(1,167
)
 
(2,574
)
Net income (loss) attributable to Comverse, Inc.
18,686

 
5,081

 
(15,461
)
Net cash provided by (used in) operating activities - continuing operations
6,621

 
28,190

 
(13,361
)
Non-GAAP Financial Measures
—

 
 
 
 
Comverse performance
$
56,649

 
$
35,415

 
$
73,845

Comverse performance margin
8.7
%
 
5.2
 %
 
9.6
%
Reconciliation of Income (Loss) from Operations to Comverse Performance
We provide Comverse performance, a non-GAAP financial measure, as additional information for our operating results. This measure is not in accordance with, or an alternative for, GAAP financial measures and may be different from, or not comparable to similarly titled or other non-GAAP financial measures used by other companies. We believe that the presentation of this non-GAAP financial measure provides useful information to investors regarding certain additional financial and business trends relating to our results of operations as viewed by management in monitoring our businesses, reviewing our financial results and for planning purposes.

31

The following table provides a reconciliation of income (loss) from operations to Comverse performance for the fiscal years ended January 31, 2014, 2013, and 2012:
 
Fiscal Years Ended January 31,
 
2014
 
2013
 
2012
 
(Dollars in thousands)
Income (loss) from operations
$
37,699

 
$
(2,192
)
 
$
11,442

Expense Adjustments:
 
 
 
 
 
Stock-based compensation expense
10,208

 
7,517

 
3,660

Amortization of intangible assets
2,765

 
14,124

 
17,308

Compliance-related professional fees
2,144

 
245

 
10,901

Compliance-related compensation and other expenses
199

 
2,098

 
6,719

Spin-off professional fees
—

 
933

 
—

Italian VAT recovery recorded within operating expense
(10,861
)
 
—

 
—

Impairment of goodwill
—

 
5,605

 
—

Impairment of property and equipment
482

 
404

 
2,331

Certain litigation settlements and related costs
(16
)
 
(660
)
 
804

Restructuring expenses
10,783

 
5,905

 
20,728

Gain on sale of fixed assets
(41
)
 
(185
)
 
—

Other
3,287

 
1,621

 
(48
)
Total expense adjustments
18,950

 
37,607

 
62,403

Comverse performance
$
56,649

 
$
35,415

 
$
73,845

 
 
 
 
 
 
Operating margin
5.8
%
 
(0.3
)%
 
1.5
%
Total expense adjustments margin
2.9
%
 
5.5
 %
 
8.1
%
Comverse performance margin
8.7
%
 
5.2
 %
 
9.6
%
Segment Performance
We evaluate our business by assessing the performance of each of our operating segments. Our Chief Executive Officer is our chief operating decision maker (or CODM). The CODM uses segment performance, as defined below, as the primary basis for assessing the financial results of the operating segments and for the allocation of resources. Segment performance, as we define it in accordance with the Financial Accounting Standards Board's (or the FASB) guidance relating to segment reporting, is not necessarily comparable to other similarly titled captions of other companies.
Segment performance is computed by management as income (loss) from operations adjusted for the following: (i) stock-based compensation expense; (ii) amortization of intangible assets; (iii) compliance-related professional fees; (iv) compliance-related compensation and other expenses; (v) spin-off professional fees; (vi) Italian VAT recovery recorded within operating expense; (vii) impairment of goodwill; (viii) impairment of property and equipment; (ix) certain litigation settlements and related costs; (x) restructuring expenses; and (xi) certain other gains and expenses. Compliance-related professional fees and compliance-related compensation and other expenses relate to fees and expenses recorded in connection with CTI’s and our efforts to (a) complete certain financial statements and audits of such financial statements and (b) remediate material weaknesses in internal control over financial reporting.

32

Segment Financial Highlights
The following table presents, for the fiscal years ended January 31, 2014, 2013 and 2012, segment revenue, gross margin, income (loss) from operations, operating margin, segment performance and segment performance margin (reflecting segment performance as a percentage of segment revenue) for each of our reportable segments and All Other:
 
Fiscal Years Ended January 31,
 
2014
 
2013
 
2012
 
(Dollars in thousands)
SEGMENT RESULTS
 
 
 
 
 
BSS
 
 
 
 
 
Segment revenue
$
299,561

 
$
295,803

 
$
388,350

Gross margin
37.0
%
 
33.3
%
 
40.4
%
Income from operations
44,636

 
18,675

 
62,270

Operating margin
14.9
%
 
6.3
%
 
16.0
%
Segment performance
47,557

 
39,283

 
82,415

Segment performance margin
15.9
%
 
13.3
%
 
21.2
%
Digital Services
 
 
 
 
 
 Segment revenue
$
352,940

 
$
378,918

 
$
379,714

Gross margin
44.7
%
 
45.4
%
 
43.0
%
Income from operations
127,008

 
130,890

 
118,036

Operating margin
36.0
%
 
34.5
%
 
31.1
%
Segment performance
127,224

 
133,053

 
121,001

Segment performance margin
36.0
%
 
35.1
%
 
31.9
%
All Other
 
 
 
 
 
Segment revenue
$
—

 
$
3,042

 
$
3,093

Loss from operations
(133,945
)
 
(151,757
)
 
(168,864
)
Segment performance
(118,132
)
 
(136,921
)
 
(129,571
)
For a discussion of the results of our segments, see “—Results of Operations,” and note 20 to the consolidated and combined financial statements included in Item 15 of this Annual Report.
Business Trends and Uncertainties
For the fiscal year ended January 31, 2014, we had income from operations compared to a loss from operations in the fiscal year ended January 31, 2013. The change was primarily a result of decreases in costs and operating expenses, which were partially offset by decreases in revenue. Comverse performance for the fiscal year ended January 31, 2014 increased compared to the fiscal year ended January 31, 2013. For more information, see “-Results of Operations-Fiscal year Ended January 31, 2014 Compared to Fiscal Year Ended January 31, 2013- Consolidated and Combined Results.”
The decreases in revenue were primarily attributable to decreases in revenue from customer solutions in our Digital Services segment and maintenance revenue at our BSS and Digital Services segments, partially offset by an increase in revenue from BSS customer solutions. For a discussion of the reasons for the changes in revenue at our BSS and Digital Services segments, see “-BSS,” “-Digital Services,” “-Results of Operations-Fiscal year Ended January 31, 2014 Compared to Fiscal Year Ended January 31, 2013- Segment Results-BSS” and “-Results of Operations- Fiscal year Ended January 31, 2014 Compared to Fiscal Year Ended January 31, 2013-Segment Results-Digital Services.” Due to the decrease in deferred revenue and based on existing levels of customer orders (consisting of product bookings and maintenance revenue), we expect that revenue will decrease significantly in the fiscal year ending January 31, 2015 compared to the fiscal year ended January 31, 2014, as we currently expect the gap between customer orders and revenue to decrease significantly.
Total customer orders (consisting of product bookings and maintenance revenue) decreased in the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013. The decrease is primarily attributable to a significant decrease in APAC and a small decrease in EMEA, partially offset by an increase in the Americas. The increase in customer orders in the Americas reflects a reversal of a decline trend experienced in the region in prior fiscal years. In addition, the decrease in EMEA is attributable to the previously disclosed cancellation of a large maintenance

33

contract that was effective during the three months ended April 30, 2013, partially offset by an increase in product bookings.
Product bookings decreased in the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013, due to a significant decrease in APAC, partially offset by increases in the Americas and EMEA. The increases in the Americas and EMEA reflect a reversal of a decline trend experienced in these regions in prior fiscal years. We define “product bookings” as projected revenue from orders signed during a given fiscal period, excluding revenue from maintenance agreements.
During the fiscal year ended January 31, 2014, our cash and cash equivalents and restricted cash were favorably impacted primarily by CTI's placement of $25.0 million in escrow to support indemnification claims in connection with the closing of the Verint Merger Agreement, a $10.9 million Italian VAT refund and a decline in costs, operating expenses and disbursements, partially offset by a decrease in cash collections, that resulted in positive operating cash flow in the fiscal year ended January 31, 2014. The decrease in cash collections was primarily attributable to reduced customer order activity in recent years.
Our Board of Directors has adopted a program to repurchase from time to time at management’s discretion up to $30 million in shares of our common stock on the open market during the 18-month period ending October 9, 2015 at prevailing market prices. Repurchases will be made under the program using our own cash resources.
Our costs, operating expenses and disbursements decreased during the fiscal year ended January 31, 2014 primarily due to our continued focus on closely monitoring our costs and operating expenses as part of our efforts to improve our cash position and achieve long-term improved operating performance and positive operating cash flows. During the fiscal year ended January 31, 2014, as part of our efforts to reduce costs and expenses we implemented the following primary initiatives:
•
Completed the first phase of the industrialization of Comverse ONE to meet or exceed our customer requirements, for ease of use and faster deployment times to reduce deployment costs;
•
Relocated certain delivery and research and development activities to low cost centers of excellence in Eastern Europe and Asia;
•
Implemented a transformation plan in the Digital Services segment that included:
◦
a reduction in research and development expenses due to a decrease in investment in traditional value added service, partially offset by an increase in research and development investment in our new Digital Services offerings, including Evolved Communications Suite, to address recent trends in the digital services market;
◦
the deployment of new tools designed to improve efficiency in project deployment and control; and
◦
a reduction in employee headcount facilitated by previously implemented efficiency measures;
•
Implemented initiatives to reduce significantly selling, general and administrative expenses that included primarily sales and marketing, finance, information technology and facilities.
We believe that during the current fiscal year we realized some of the benefits of these initiatives and expect that the full cost savings associated with these initiatives will be reflected in our results of operations in future periods.
We intend to continue our efforts to increase customer orders in the fiscal year ending January 31, 2015 in all regions and focus on addressing maintenance pressures. There are several key elements to our overall strategy, including:
•
Expand relationships with existing customers. We intend to continue to leverage our large customer base of more than 450 CSPs, by offering them a continued evolution path to new services and technologies through upgrades and expansions, enhanced maintenance plans, professional and managed services, and the cross-sale of our solution portfolio. We intend to continue to aggressively market Comverse ONE to CSPs seeking to upgrade their existing prepaid and postpaid systems to converged billing solutions. We are also continuing to offer Kenan upgrades and related professional services to our existing Kenan customer base. We will also continue to market aggressively next generation solutions to existing customers, including rich communication service, videomail, virtualized MultiVAS, our Evolved Communication Suite and other IP-based services and cloud-based solutions.
•
Expand customer base and market share. We intend to continue our efforts to expand our customer base and market shares by leveraging relationships with multinational CSPs seeking to acquire or establish offshore operations. We also seek engagements with newly established communication

34

service providers and will continue our efforts to displace competitors in engagements with established providers. In addition, we believe we are well positioned to replace competitors who are exiting parts of the market and intend to continue to aggressively pursue such growth opportunities.
•
Leverage CSPs transition to IP networks. We plan to continue to market our next generation Digital Services solutions to CSPs seeking to transition their networks to newer IP technology, such as 4G LTE. Our next generation Digital Services portfolio is designed to enable CSPs to become digital lifestyle players and capture growth opportunities through next generation digital services. We believe that our Evolved Communication Suite will enable CSPs to launch new services such as RCS, accelerate the adoption of CSP driven smartphone applications, leverage subscribers’ social profiles, evolve retail and marketing to the digital world and monetize additional services, including machine to machine and Mobile Commerce.
•
Expand our presence and market share in the BSS market. We believe our BSS solutions offer customers several advantages over competitors’ solutions, including faster time to market and lower total cost of ownership. We intend to focus on expanding our position in the converged billing market through new customer engagements.
•
Focus on offering managed services. We intend to continue to offer our customers managed services as part of our BSS and Digital Services offerings. Managed services enable us to assume responsibility for the operation and management of our customers’ systems. Our customers receive improved efficiencies relating to the operation and management of their systems, thereby allowing them to focus on their own internal business needs and strengths with reduced management distraction. Managed services also represent a source of predictable revenue and foster long-term customer relationships.
In order to improve operating performance and cash flow from operations, we intend to continue to implement initiatives which we believe will enhance efficiency and result in significant reductions in costs and operating expenses. The initiatives include:
•
Prioritizing the second phase of the industrialization of our Comverse ONE solution;
•
Expanding the use of low cost centers of excellence and research and development centers in Eastern Europe and Asia; and
•
Realigning our cost structure to our current size and business environment.
During the fiscal year ended January 31, 2014, we commenced our plan to make investments relating to upgrades of systems and tools that we believe will increase operational efficiency and result in cost reductions in future fiscal periods. As part of this initiative, we plan to make additional investments in upgrades of systems and tools during the fiscal years ending January 31, 2015 and beyond. As a result of these initiatives, we expect that our costs and expenses will continue to decline in future fiscal periods.
Our principal business activities are reported through the following segments:
•
BSS, which provides our converged, prepaid and postpaid billing and BSS for wireless, wireline, cable and multi-play CSPs, delivering a value proposition designed to enable an effective service and data monetization, a consistent, enhanced customer experience, reduced complexity and cost, and real-time choice and control; and
•
Digital Services, which conducts our voice and messaging services (including voicemail, visual voicemail, call completion, SMS, and MMS), and IP based rich communication services (including group chat, file transfer, video share, social, presence and geo-location information).
BSS
In the fiscal year ended January 31, 2014, BSS product bookings decreased compared to the fiscal year ended January 31, 2013. We believe that the decrease in BSS product bookings was primarily attributable to (i) the deferral of significant capital investments involved in deploying our BSS solutions and upgrading existing prepaid or postpaid systems to our converged BSS solution, (ii) the cancellation of projects by customers who prioritized their capital expenditures to the deployment of next generation networks, including LTE, (iii) the loss of projects to significantly larger competitors who bundled the BSS transformation with an overall network deployment project and (iv) adverse economic conditions in certain regions, including APAC (primarily India).
Revenue from BSS customer solutions for the fiscal year ended January 31, 2014 increased compared to the fiscal year ended January 31, 2013. The increase in revenue from BSS customer solutions was primarily attributable to changes in scope and settlements of certain customer contracts that negatively impacted revenue in the fiscal year ended January 31, 2013 and settlements of certain other customer contracts that positively impacted revenue in the fiscal year

35

ended January 31, 2014. Revenue from BSS customer solutions continued to be adversely affected by lower volume of BSS projects in the current fiscal periods resulting from reduced product bookings in recent years. BSS maintenance revenue for the fiscal year ended January 31, 2014 decreased compared to the fiscal year ended January 31, 2013. The decrease mainly reflected the impact on maintenance revenue for the fiscal year ended January 31, 2014 attributable to the previously disclosed cancellation of a large maintenance contract that was effective during the three months ended April 30, 2013.
We believe we have a leading industry position in the BSS converged billing market and believe that we are well positioned to take advantage of the growth in the converged BSS market. As part of our strategy, we are continuing our efforts to expand our presence and market share in the BSS market with BSS solutions that we believe offer several advantages over competitors' offerings, including faster time to market and lower total cost of ownership. We continue to offer our existing prepaid and postpaid customer base upgrades and an evolution path to our Comverse ONE converged billing solution, which we believe better addresses the enhanced business needs of CSPs. In addition, we continue to aggressively pursue opportunities to market our BSS solutions, primarily Comverse ONE, to new customers as part of our efforts to increase our customer base. To maintain our market leadership in BSS convergence and monetization of new business models, we continue to expend significant resources on research and development to further enhance Comverse ONE and its advanced monetization capabilities, including support for new business models such as cloud services.
We continue to focus on increasing our BSS revenue and improving our margins by providing a growth and evolution path to our Kenan postpaid billing customers including upgrades and expansions. We also offer Kenan solutions to CSPs who are not prepared to commit to a full converged transformation. As part of our strategy, we recently launched a new and enhanced version of Comverse Kenan and intend to continue to invest in our Kenan solution and expect that Kenan will contribute to our growth in BSS in future periods. CSPs are experiencing growth in global wireless subscriptions and traffic and a rapid growth in the use of advanced services, such as data services and Internet browsing. In response to these market trends, CSPs require enhanced BSS system functionality to accommodate their business needs. As a result, BSS is facing increasing complexity of project deployment resulting in extended periods of time required to complete project milestones and receive customer acceptance which are generally required for revenue recognition and receipt of payment. To address these challenges, BSS continues its efforts to improve its delivery and implementation capabilities to reduce costs and expenses. In addition, project complexity impacts our customers’ ability to meet their obligations as part of the delivery process which has at times also resulted in project delivery delays. Furthermore, our customers encounter issues in managing the operations of their BSS systems and tend to rely more heavily on our support services. To address our customer challenges, we are broadening our service offerings to existing and new customers, including managed services, which we expect will add to our growth potential in BSS going forward.
We believe that our BSS solutions’ offering has the potential to become a key driver of growth going forward. We expect that as a leader in the BSS market, we will continue to build on the strength of our Comverse ONE and Kenan solutions. We also expect that growth in mobile data traffic will increase the demand for our policy solutions, which include policy management and enforcement, deep packet inspection and smart data monetization solutions all of which are integrated into our BSS solutions. In implementing our growth strategy, we plan to focus our efforts on increasing our presence primarily in areas of growth and leveraging our customer base.
Digital Services
Digital Services product bookings for the fiscal year ended January 31, 2014 decreased compared to the fiscal year ended January 31, 2013. This decrease is attributable to a decline in product bookings related to Digital Services' traditional solutions, such as voicemail, SMS and MMS, which was not fully offset by an increase in product bookings for new IP based advanced offerings of our Digital Services solution portfolio. In addition, the decrease in Digital Services’ product bookings was partially attributable to a decline in APAC primarily due to a delay in orders from a large customer in APAC.
Revenue from Digital Services customer solutions for the fiscal year ended January 31, 2014 decreased compared to the fiscal year ended January 31, 2013 primarily due to a decrease in revenue recognized from several large percentage of completion projects that were completed in the fiscal year ended January 31, 2013, which was partially offset by an increase in revenue from customer acceptances that were completed in the fiscal year ended January 31, 2014. Digital Services maintenance revenue for the fiscal year ended January 31, 2014 decreased primarily due to the cancellation and reduction in fees of several maintenance contracts, which was partially offset by an increase in maintenance revenue attributable to maintenance services provided to customers during the initial service period.

36

We continue to maintain our market leadership in providing solutions to CSPs based on voice and messaging services, such as voicemail, call completion, SMS and MMS. However, CSPs face increasing competition from both Internet players and mobile device manufacturers, using new technologies that may provide alternatives to CSP products and services. For example, the introduction of IP-based applications on wireless devices, typically referred to as Over The Top (or OTT) services, allows end users to utilize IP-based services, such as Facebook, Facetime Google, Whatsapp, Line or Skype, to access, among other things, IP communications free of charge rather than use similar services provided by CSPs. Furthermore, these CSP services continue to face competition from low-cost competitors from emerging markets. We believe these changes have reduced demand for traditional communication products and services and increased pricing pressures, which have in turn adversely impacted our revenue and margins.
At the same time, the growth in global wireless subscriptions, and high growth wireless segments, such as data services and Internet browsing are pushing CSPs to evolve to 4G/LTE IP-based network technologies, supporting the demand for several of our products. As part of our efforts to maintain our market position and leverage these recent trends, our Digital Services domain is engaged in the promotion of advanced offerings, such as visual voicemail, call management, IP messaging, our Evolved Communication Suite (which extends the industry’s Rich Communication Suite (or RCS)) offered on premises or as Software-as-a-Service (SaaS) cloud-based solutions. We believe demand for advanced offerings may grow due to the increasing deployment of smartphones by CSPs and the growth in IP based 4G networks. Accordingly, we continue to expend significant resources on Digital Service research and development activities in order to enhance existing products and develop new solutions.
We plan to continue to aggressively market our Digital Service products, leverage our leading market position to replace competitors and sell capacity expansions and other solutions to existing customers.
Managed Services
Managed through our BSS and Digital Services business units, we continue to emphasize a suite of managed services. In the fiscal year ended January 31, 2014, we invested significant resources in solidifying our managed services organization, hired senior leadership and enhanced our processes and methodologies. As a result, we experienced a significant increase in product bookings for our managed services offering for the current fiscal year compared to the prior fiscal year and we expect that managed services will continue to be an important component of our growth strategy in future periods.
Our managed services offering enables us to assume responsibility for the operation and management of our customers' billing and digital services systems. Our managed services suite is designed to provide customers with improved efficiencies relating to the operation and management of their systems, thereby allowing them to focus on their own internal business needs and strengths with reduced management distraction. Managed services provide us with recurring and predictable revenue and are used by us to create and establish long-term relationships with customers as well as cross-sell additional solutions and system enhancements. We believe that the longevity of Comverse's customer relationships and the recurring revenue that such relationships generate provide us with stability and a competitive advantage in marketing our solutions to our existing customer base.
Uncertainties Impacting Future Performance
Mix of Revenue in Digital Services
It is unclear whether our advanced Digital Services offerings will be widely adopted by existing and potential customers. Currently, we are unable to predict whether sales of advanced offerings will exceed or fully offset declines in the sale of traditional Digital Services solutions. If sales of advanced offerings do not increase or if increases in sales of advanced offerings do not exceed or fully offset any declines in sales of traditional solutions, due to adverse market trends, changes in consumer preferences or otherwise, our revenue, profitability and cash flows would likely be materially adversely affected.
Change in CSP Capital Expenditure Priorities
During the fiscal year ended January 31, 2014, several large-scale projects that we were pursuing were ultimately canceled by customers, who prioritized their capital expenditure budgets to the deployment of next generation networks, including LTE, rather than engage in BSS transformations. If this trend continues in future periods, our ability to achieve growth in BSS may be materially adversely affected.

37

Difficulty in Forecasting Product Bookings
Our product bookings are difficult to predict. A high percentage of our product bookings have typically been generated late in fiscal quarters. In addition, based on historical industry spending patterns of CSPs, we typically forecast our highest product booking levels in our fourth fiscal quarter. This trend makes it difficult for us to forecast our annual product bookings and to implement effective measures to cover any shortfalls of prior fiscal quarters if product bookings for the fourth fiscal quarter fail to meet our expectations. Furthermore, we continue to emphasize large capacity systems in our product development and marketing strategies. Contracts for BSS and Digital Services installations typically involve a lengthy, complex and highly competitive bidding and selection process, and our ability to obtain particular contracts is inherently difficult to predict. A delay, cancellation or other factor resulting in the postponement or cancellation of significant orders may cause us to miss our projections.
Share Distribution
In connection with the Share Distribution, we entered into the Distribution Agreement with CTI pursuant to which, among other things, we agreed to indemnify CTI and its affiliates (including Verint after the Verint Merger) against certain losses that may arise as a result of the Verint Merger and the Share Distribution. To the extent that we are required to make payments to satisfy these indemnification obligations, our liquidity could be impacted. See Item 1A, “Risk Factors-Risks Relating to our Operation as an Independent, Publicly-Traded Company-We agreed to indemnify CTI and its affiliates and following the completion of the Verint Merger are required to indemnify Verint against certain claims or losses that may arise in connection with the Verint Merger and the Share Distribution."

RESULTS OF OPERATIONS
The following discussion provides an analysis of our consolidated and combined results and the results of operations of each of our segments for the fiscal periods presented. The discussion of the results of operations of each of our segments provides a more detailed analysis of the results of each segment presented. Accordingly, the discussion of our consolidated and combined results should be read in conjunction with the discussions of the results of operations of our segments.

38

Fiscal Year Ended January 31, 2014 Compared to Fiscal Year Ended January 31, 2013
Consolidated and Combined Results
 
Fiscal Years Ended January 31,
 
Change
 
2014
 
2013
 
Amount
 
Percent
 
(Dollars in thousands, except per share data)
Total revenue
$
652,501

 
$
677,763

 
$
(25,262
)
 
(3.7
)%
Costs and expenses
 
 
 
 
 
 
 
Cost of revenue
402,476

 
431,644

 
(29,168
)
 
(6.8
)%
Research and development, net
67,512

 
76,461

 
(8,949
)
 
(11.7
)%
Selling, general and administrative
134,031

 
160,340

 
(26,309
)
 
(16.4
)%
Other operating expenses
10,783

 
11,510

 
(727
)
 
(6.3
)%
Total costs and expenses
614,802

 
679,955

 
(65,153
)
 
(9.6
)%
Income (loss) from operations
37,699

 
(2,192
)
 
39,891

 
N/M

Interest income
614

 
829

 
(215
)
 
(25.9
)%
Interest expense
(847
)
 
(901
)
 
54

 
(6.0
)%
Interest expense on notes payable to CTI
—

 
(455
)
 
455

 
(100.0
)%
Other expense, net
(9,591
)
 
(4,049
)
 
(5,542
)
 
136.9
 %
Income tax expense
(9,189
)
 
(13,526
)
 
4,337

 
(32.1
)%
Net income (loss) from continuing operations
18,686

 
(20,294
)
 
38,980

 
N/M

Income from discontinued operations, net of tax
—

 
26,542

 
(26,542
)
 
(100.0
)%
Net income
18,686

 
6,248

 
12,438

 
199.1
 %
Less: Net income attributable to noncontrolling interest
—

 
(1,167
)
 
1,167

 
(100.0
)%
Net income attributable to Comverse, Inc.
$
18,686

 
$
5,081

 
$
13,605

 
267.8
 %
Net income (loss) attributable to Comverse, Inc.:
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
18,686

 
$
(20,294
)
 
$
38,980

 
 
Income from discontinued operations, net of tax
—

 
25,375

 
(25,375
)
 
 
Net income attributable to Comverse, Inc.
$
18,686

 
$
5,081

 
$
13,605

 
 
Earnings (loss) per share attributable to Comverse, Inc.’s stockholders:
 
 
 
 
 
 
 
Basic earnings (loss) per share
 
 
 
 
 
 
 
Continuing operations
$
0.84

 
$
(0.93
)
 
$
1.77

 
 
Discontinued operations
$
—

 
$
1.16

 
$
(1.16
)
 
 
Diluted earnings (loss) per share
 
 
 
 
 
 
 
Continuing operations
$
0.83

 
$
(0.93
)
 
$
1.76

 
 
Discontinued operations
$
—

 
$
1.16

 
$
(1.16
)
 
 
Total Revenue
Management analyzes our revenue by: (i) revenue generated from customer solutions, and (ii) maintenance revenue. Revenue generated from customer solutions consists primarily of the licensing of our customer solutions, hardware and related professional services and training. Professional services primarily include installation, customization and consulting services. Certain revenue arrangements that require significant customization of a product to meet the particular requirements of a customer are recognized under the percentage-of-completion method. The vast majority of the percentage-of-completion method arrangements are fixed-fee contracts. Maintenance revenue consists of post-contract customer support (or PCS), including technical software support services, unspecified software updates or upgrades to customers on a when-and-if-available basis.
Revenue from customer solutions was $389.2 million for the fiscal year ended January 31, 2014, a decrease of $11.7 million, or 2.9%, compared to the fiscal year ended January 31, 2013. The decrease was attributable to a decline of $22.7 million and $3.0 million in customer solutions revenue in the Digital Services segment and All Other, respectively, partially offset by an increase of $14.0 million in the BSS segment. Revenue recognized using the percentage-of-completion method was $146.2 million and $144.4 million for the fiscal years ended January 31, 2014 and 2013, respectively.

39

Maintenance revenue was $263.3 million for the fiscal year ended January 31, 2014, a decrease of $13.5 million, or 4.9%, compared to the fiscal year ended January 31, 2013. This decrease was primarily attributable to declines of $10.2 million and $3.3 million in maintenance revenue in the BSS and Digital Services segments, respectively.
Revenue by Geographic Region
Revenue in the Americas, APAC and Europe, Middle East and Africa (or EMEA) represented approximately 40%, 25% and 35% of our revenue, respectively, for the fiscal year ended January 31, 2014 compared to approximately 35%, 28% and 37% of our revenue, respectively, for the fiscal year ended January 31, 2013.
Foreign Currency Impact on Revenue
Our functional currency for financial reporting purposes is the U.S. dollar. The majority of our revenue for the fiscal year ended January 31, 2014 was derived from transactions denominated in U.S. dollars. All other revenue was derived from transactions denominated in various foreign currencies, primarily the British pound, euro and Japanese yen. For the fiscal year ended January 31, 2014, fluctuations in the U.S. dollar relative to foreign currencies in which we conducted business unfavorably impacted revenue by $7.8 million compared to the fiscal year ended January 31, 2013, primarily due to a $6.9 million unfavorable impact of the Japanese yen.
Foreign Currency Impact on Costs
A significant portion of our expenses, principally personnel-related costs, is incurred in new Israeli shekel (or NIS), whereas our functional currency for financial reporting purposes is the U.S. dollar. A strengthening of the NIS against the U.S. dollar would increase the U.S. dollar value of our expenses in Israel. In order to mitigate this risk we enter into foreign currency forward contracts to hedge foreign currency exchange rate fluctuations.
For the fiscal year ended January 31, 2014, fluctuations in the U.S. dollar relative to all foreign currencies in which we conducted business unfavorably impacted costs by $4.0 million compared to the fiscal year ended January 31, 2013, primarily due to a strengthening of the NIS against the U.S. dollar, net of hedging activity, resulting in a $6.5 million unfavorable impact partially offset by a $1.7 million favorable impact of the Japanese yen.
Cost of Revenue
Cost of revenue primarily consists of (i) material costs, (ii) compensation and related overhead expenses for personnel involved in the customization of our products, customer delivery and maintenance and professional services, (iii) contractor costs, (iv) royalties and license fees, (v) depreciation of equipment used in operations, and (vi) amortization of capitalized software costs and certain purchased intangible assets.
Cost of revenue was $402.5 million for the fiscal year ended January 31, 2014, a decrease of $29.2 million, or 6.8%, compared to the fiscal year ended January 31, 2013. The decrease was attributable to declines in costs of $8.8 million, $11.6 million and $8.8 million in the BSS and Digital Services segments and All Other, respectively, for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013.
Research and Development, Net
Research and development expenses, net, primarily consist of personnel-related costs involved in product development and third party development and programming costs net of benefits from participation in programs sponsored by the Government of Israel for the support of research and development activities in Israel and others.
Research and development expenses, net were $67.5 million for the fiscal year ended January 31, 2014, a decrease of $8.9 million, or 11.7%, compared to the fiscal year ended January 31, 2013. The decrease was primarily attributable to a decline of $11.1 million in the Digital Services segment, partially offset by an increase of $1.7 million and $0.5 million at All Other and in the BSS segment, respectively.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of compensation and related expenses of personnel involved in sales, marketing, finance, legal and management and professional fees related to such functions.
Selling, general and administrative expenses were $134.0 million for the fiscal year ended January 31, 2014, a decrease of $26.3 million, or 16.4%, compared to the fiscal year ended January 31, 2013. The decrease was primarily attributable to declines of $18.6 million and $8.3 million at All Other and in the BSS segment, respectively, partially offset by an increase of $0.6 million in the Digital Services segment.

40

Other Operating Expenses
Other operating expenses consist of operating expenses not included in research and development, net and selling, general and administrative expenses and for the fiscal periods presented primarily consist of restructuring expenses and impairment of goodwill.
Other operating expenses were $10.8 million for the fiscal year ended January 31, 2014, a decrease of $0.7 million, or 6.3% compared to the fiscal year ended January 31, 2013. The decrease was attributable to a decline of $5.6 million in the BSS segment, partially offset by an increase of $4.9 million at All Other.
Income (Loss) from Operations
Income from operations was $37.7 million for the fiscal year ended January 31, 2014, a change of $39.9 million compared to a loss from operations of $2.2 million for the fiscal year ended January 31, 2013. The increase was primarily attributable to an increase in income from operations of $26.0 million in the BSS segment and a decrease in loss from operations of $17.8 million at All Other, partially offset by a decrease in income from operations of $3.9 million in the Digital Services segment.
Interest Income
Interest income was $0.6 million for the fiscal year ended January 31, 2014, a decrease of $0.2 million, or 25.9%, compared to the fiscal year ended January 31, 2013. The decrease was primarily attributable to a decrease in interest rates.
Interest Expense
Interest expense was $0.8 million for the fiscal year ended January 31, 2014, a decrease of $0.1 million, or 6.0%, compared to the fiscal year ended January 31, 2013.
Interest Expense on Notes Payable to CTI
Interest expense on notes payable to CTI consists of interest expense that was payable by us to CTI prior to the Share Distribution under a promissory note dated January 11, 2011 and a revolving loan agreement dated May 9, 2012 (referred to as the loan agreement).
Interest expense on notes payable to CTI was $0.5 million for the fiscal year ended January 31, 2013. For more information about this note and the loan agreement, see note 11 of the consolidated and combined financial statements included in Item 15 of this Annual Report.
Income Tax Expense
Income tax expense from continuing operations was $9.2 million for the fiscal year ended January 31, 2014, representing an effective tax rate of 33.0%, compared to income tax provision from continuing operations of $13.5 million, representing an effective tax rate of (199.9)% for the fiscal year ended January 31, 2013. The effective tax rate was lower than the U.S federal statutory rate of 35% primarily due to the mix of income and losses by jurisdiction and because we did not record an income tax benefit on losses in certain jurisdictions in which we maintain valuation allowances against certain of our U.S. and foreign net deferred tax assets. The income tax expense from continuing operations for the period is comprised primarily of income tax expense recorded in non-loss jurisdictions, withholding taxes, and certain tax contingencies recorded in the fiscal years ended January 31, 2014 and 2013. We recorded a reduction in our uncertain tax provision liability and a net reduction of income tax expense of $16.5 million during the fiscal year ended January 31, 2014, primarily due to the expiration of statutes of limitations in various jurisdictions. Of the $16.5 million net reduction of income tax, approximately $3.6 million was a correction of an error recorded in the 2005 to 2012 fiscal years. For additional information, see note 19 of the consolidated and combined financial statements included in Item 15 of this Annual Report.
Our tax provision is subject to significant year over year and quarter-to-quarter variability based on numerous factors noted above. For the fiscal year ending January 31, 2015, we currently expect our income tax expense to be in the range of $25.0 million to $30.0 million and our cash paid for taxes (including withholding taxes paid by our customers in various jurisdictions) to be between $13.0 million and $17.0 million.
Income from Discontinued Operations, Net of Tax
Income from discontinued operations represents the results of operations of Starhome, including the gain on sale of Starhome, net of tax.

41

Income from discontinued operations, net of tax, was $26.5 million for the fiscal year ended January 31, 2013, primarily attributable to $22.6 million gain on sale of Starhome. See note 16 of the consolidated and combined financial statements included in Item 15 of this Annual Report.
Net Income
Net income was $18.7 million for the fiscal year ended January 31, 2014, an increase of $12.4 million or 199.1% compared to the fiscal year ended January 31, 2013 due primarily to the reasons discussed above.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest in Starhome was $1.2 million for the fiscal year ended January 31, 2013.
Segment Results
BSS
 
Fiscal Years Ended January 31,
 
Change
 
2014
 
2013
 
Amount
 
Percent
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Total revenue
$
299,561

 
$
295,803

 
$
3,758

 
1.3
 %
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
188,644

 
197,401

 
(8,757
)
 
(4.4
)%
Research and development, net
39,779

 
39,308

 
471

 
1.2
 %
Selling, general and administrative
26,502

 
34,814

 
(8,312
)
 
(23.9
)%
Other operating expenses
—

 
5,605

 
(5,605
)
 
(100.0
)%
Total costs and expenses
254,925

 
277,128

 
(22,203
)
 
(8.0
)%
Income from operations
$
44,636

 
$
18,675

 
$
25,961

 
139.0
 %
Computation of segment performance:
 
 
 
 
 
 
 
Segment revenue
$
299,561

 
$
295,803

 
$
3,758

 
1.3
 %
Total costs and expenses
$
254,925

 
$
277,128

 
$
(22,203
)
 
(8.0
)%
Segment expense adjustments:
 
 
 
 
 
 
 
Amortization of intangible assets
2,765

 
14,124

 
(11,359
)
 
(80.4
)%
Compliance-related compensation and other expenses
122

 
877

 
(755
)
 
(86.1
)%
Impairment of goodwill
—

 
5,605

 
(5,605
)
 
(100.0
)%
Impairment of property and equipment
28

 
2

 
26

 
N/M

Other
6

 
—

 
6

 
N/M

Segment expense adjustments
2,921

 
20,608

 
(17,687
)
 
(85.8
)%
Segment expenses
252,004

 
256,520

 
(4,516
)
 
(1.8
)%
Segment performance
$
47,557

 
$
39,283

 
$
8,274

 
21.1
 %
Revenue
Revenue from BSS customer solutions was $171.5 million for the fiscal year ended January 31, 2014, an increase of $14.0 million, or 8.9%, compared to the fiscal year ended January 31, 2013. The increase in revenue from BSS customer solutions was primarily attributable to changes in scope and settlements of certain customer contracts that negatively impacted revenue in the fiscal year ended January 31, 2013 and settlements of certain other customer contracts that positively impacted revenue in the fiscal year ended January 31, 2014.
BSS maintenance revenue was $128.0 million for the fiscal year ended January 31, 2014, a decrease of $10.2 million or 7.4%, compared to the fiscal year ended January 31, 2013. The decrease mainly reflected the impact on BSS maintenance revenue for the fiscal year ended January 31, 2014 attributable to the previously disclosed cancellation of a large maintenance contract that was effective during the three months ended April 30, 2013.

42

Revenue by Geographic Region
Revenue in the Americas, APAC, and EMEA represented approximately 24%, 27% and 49% of BSS's revenue, respectively, for the fiscal year ended January 31, 2014 compared to approximately 25%, 27% and 48% of BSS's revenue, respectively, for the fiscal year ended January 31, 2013. The revenue percentages per geographic region remained relatively unchanged for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013.
Foreign Currency Impact on Revenue
For the fiscal year ended January 31, 2014, fluctuations in the U.S. dollar relative to foreign currencies in which BSS conducted business compared to the fiscal year ended January 31, 2013 unfavorably impacted revenue by $1.0 million, primarily due to a $1.5 million unfavorable impact of the Brazilian real, a $0.7 million unfavorable impact of the Australian dollar, and a $0.5 million unfavorable impact of the Indian rupee, which was offset by a favorable impact of $1.8 million of the euro.
Cost of Revenue
Cost of revenue was $188.6 million for the fiscal year ended January 31, 2014, a decrease of $8.8 million, or 4.4%, compared to the fiscal year ended January 31, 2013. The decrease was primarily attributable to a decrease of $11.1 million in amortization of intangible assets due to certain intangible assets becoming fully amortized in the prior year partially offset by an increase in cost of revenue due to an increase in revenue.
Research and Development, Net
Research and development expenses, net, were $39.8 million for the fiscal year ended January 31, 2014, an increase of $0.5 million, or 1.2%, compared to the fiscal year ended January 31, 2013.
Selling, General and Administrative
Selling, general and administrative expenses were $26.5 million for the fiscal year ended January 31, 2014, a decrease of $8.3 million, or 23.9%, compared to the fiscal year ended January 31, 2013. The decrease was primarily attributable to a $7.7 million decrease in agent commissions due primarily to the mix of bookings generated from certain projects and in certain geographic locations.
Segment Performance
Segment performance was $47.6 million for the fiscal year ended January 31, 2014 based on segment revenue of $299.6 million, representing a segment performance margin of 15.9% as a percentage of segment revenue. Segment performance was $39.3 million for the fiscal year ended January 31, 2013 based on segment revenue of $295.8 million, representing a segment performance margin of 13.3% as a percentage of segment revenue. The increase in segment performance margin was primarily attributable to increased gross margins and the decrease in selling, general and administrative expenses for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013.

43

Digital Services
 
Fiscal Years Ended January 31,
 
Change
 
2014
 
2013
 
Amount
 
Percent
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Total revenue
$
352,940

 
$
378,918

 
$
(25,978
)
 
(6.9
)%
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
195,219

 
206,807

 
(11,588
)
 
(5.6
)%
Research and development, net
23,306

 
34,382

 
(11,076
)
 
(32.2
)%
Selling, general and administrative
7,407

 
6,839

 
568

 
8.3
 %
Total costs and expenses
225,932

 
248,028

 
(22,096
)
 
(8.9
)%
Income from operations
$
127,008

 
$
130,890

 
$
(3,882
)
 
(3.0
)%
Computation of segment performance:
 
 
 
 
 
 
 
Segment revenue
$
352,940

 
$
378,918

 
$
(25,978
)
 
(6.9
)%
Total costs and expenses
$
225,932

 
$
248,028

 
$
(22,096
)
 
(8.9
)%
Segment expense adjustments:
 
 
 
 
 
 
 
Compliance-related compensation and other expenses
216

 
2,314

 
(2,098
)
 
(90.7
)%
Certain litigation settlements and related costs
—

 
(151
)
 
151

 
(100.0
)%
Segment expense adjustments
216

 
2,163

 
(1,947
)
 
(90.0
)%
Segment expenses
225,716

 
245,865

 
(20,149
)
 
(8.2
)%
Segment performance
$
127,224

 
$
133,053

 
$
(5,829
)
 
(4.4
)%
Revenue
Revenue from Digital Services customer solutions was $217.7 million for the fiscal year ended January 31, 2014, a decrease of $22.7 million, or 9.4%, compared to the fiscal year ended January 31, 2013. The decrease in revenue from Digital Services customer solutions was primarily attributable to a decrease in revenue recognized from several large percentage of completion projects that were completed in the fiscal year ended January 31, 2013, which was partially offset by an increase in revenue from customer acceptances that were completed in the fiscal year ended January 31, 2014.
Digital Services maintenance revenue was $135.2 million for the fiscal year ended January 31, 2014, a decrease of $3.3 million, or 2.4%, compared to the fiscal year ended January 31, 2013. The decrease was primarily attributable to the cancellation and reduction in fees of several maintenance contracts, which was partially offset by an increase in maintenance revenue attributable to maintenance services provided to customers during the initial service period.
Revenue by Geographic Region
Revenue in the Americas, APAC and EMEA represented approximately 53%, 23% and 24% of revenue, respectively, for the fiscal year ended January 31, 2014 compared to approximately 42%, 29% and 29% of revenue, respectively, for the fiscal year ended January 31, 2013. The change in regional revenue percentages was primarily attributable to an increase in customer solutions revenue for a large Americas customer and a decrease in customer solutions revenue for a large APAC customer.
Foreign Currency Impact on Revenue
For the fiscal year ended January 31, 2014, fluctuations in the U.S. dollar relative to foreign currencies in which Digital Services conducted business compared to the fiscal year ended January 31, 2013 unfavorably impacted revenue by $6.7 million primarily due to a $6.9 million unfavorable impact of the Japanese yen.
Cost of Revenue
Cost of revenue was $195.2 million for the fiscal year ended January 31, 2014, a decrease of $11.6 million, or 5.6%, compared to the fiscal year ended January 31, 2013. The decrease was primarily attributable to lower revenue.

44

Research and Development, Net
Research and development expenses, net were $23.3 million for the fiscal year ended January 31, 2014, a decrease of $11.1 million, or 32.2%, compared to the fiscal year ended January 31, 2013. The decrease was primarily attributable to our continued optimization of resources between high and low cost research and development centers in Europe and Asia, as well as our increased investment in the new Digital Services offerings, that are developed on modern, virtualized platforms and are therefore more cost-efficient.
Selling, General and Administrative
Selling, general and administrative expenses were $7.4 million for the fiscal year ended January 31, 2014, an increase of $0.6 million, or 8.3%, compared to the fiscal year ended January 31, 2013. The increase was primarily attributable to an increase in agent commission expense principally due to the change in mix of bookings.
Segment Performance
Segment performance was $127.2 million for the fiscal year ended January 31, 2014 based on segment revenue of $352.9 million, representing a segment performance margin of 36.0% as a percentage of segment revenue. Segment performance was $133.1 million for the fiscal year ended January 31, 2013 based on segment revenue of $378.9 million, representing a segment performance margin of 35.1% as a percentage of segment revenue. The increase in segment performance margin was primarily attributable to the decreases in cost of revenue and in research and development expenses, net, partially offset by the decrease in revenue.
All Other
 
Fiscal Years Ended January 31,
 
Change
 
2014
 
2013
 
Amount
 
Percent
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Total revenue
$
—

 
$
3,042

 
$
(3,042
)
 
(100.0
)%
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
18,611

 
27,436

 
(8,825
)
 
(32.2
)%
Research and development, net
4,427

 
2,771

 
1,656

 
59.8
 %
Selling, general and administrative
100,124

 
118,687

 
(18,563
)
 
(15.6
)%
Other operating expenses
10,783

 
5,905

 
4,878

 
82.6
 %
Total costs and expenses
133,945

 
154,799

 
(20,854
)
 
(13.5
)%
Loss from operations
$
(133,945
)
 
$
(151,757
)
 
$
17,812

 
(11.7
)%
Computation of segment performance:
 
 
 
 
 
 
 
Segment revenue
$
—

 
$
3,042

 
$
(3,042
)
 
(100.0
)%
Total costs and expenses
$
133,945

 
$
154,799

 
$
(20,854
)
 
(13.5
)%
Segment expense adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense
10,208

 
7,517

 
2,691

 
35.8
 %
Compliance-related professional fees
2,144

 
245

 
1,899

 
775.1
 %
Compliance-related compensation and other expenses
(139
)
 
(1,093
)
 
954

 
(87.3
)%
Spin-off professional fees
—

 
933

 
(933
)
 
(100.0
)%
Italian VAT recovery recorded within operating expense
(10,861
)
 
—

 
(10,861
)
 
N/M

Impairment of property and equipment
454

 
402

 
52

 
12.9
 %
Certain litigation settlements and related costs
(16
)
 
(509
)
 
493

 
(96.9
)%
Restructuring expenses
10,783

 
5,905

 
4,878

 
82.6
 %
Gain on sale of fixed assets
(41
)
 
(185
)
 
144

 
(77.8
)%
Other
3,281

 
1,621

 
1,660

 
102.4
 %
Segment expense adjustments
15,813

 
14,836

 
977

 
6.6
 %
Segment expenses
118,132

 
139,963

 
(21,831
)
 
(15.6
)%
Segment performance
$
(118,132
)
 
$
(136,921
)
 
$
18,789

 
(13.7
)%

45

Revenue
Revenue for All Other represents the Company's revenue from transactions with Starhome prior to its sale on October 19, 2012. Revenue was $3.0 million for the fiscal year ended January 31, 2013.
Cost of Revenue
Cost of revenue is primarily attributable to unallocated shared services costs associated with customer projects in the BSS and Digital Services segments. These shared services costs relate to several organizations that provide delivery and support services to both BSS and Digital Services segments and whose costs are not allocated to BSS and Digital Services, such as our centralized call center, business operations, quality assurance infrastructure and management teams. In addition, management views certain costs as corporate expenses such as stock compensation expense and inventory write-offs, which are included in All Other. In the fiscal year ended January 31, 2014, the Italian VAT refund was also included in All Other.
Cost of revenue was $18.6 million for the fiscal year ended January 31, 2014, a decrease of $8.8 million, or 32.2%, compared to the fiscal year ended January 31, 2013. The decrease was primarily attributable to a $10.9 million VAT refund received in the fiscal year ended January 31, 2014 and a $3.5 million decrease due to a decrease in inventory write-offs that occurred for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013. These decreases were partially offset by a $5.0 million increase in personnel-related costs related to the various organizations that provide services to both the BSS and Digital Services segments, such as project management, quality assurance, and support.
Research and Development, Net
Research and development expenses, net, primarily include expenses incurred by our centralized research and development departments that support the BSS and Digital Services segments.
Research and development expenses, net, were $4.4 million for the fiscal year ended January 31, 2014, an increase of $1.7 million, or 59.8%, compared to the fiscal year ended January 31, 2013. The increase was primarily attributable to a $1.2 million increase in personnel related costs of our centralized research and development department.
Selling, General and Administrative
Selling, general and administrative expenses consist of expenses incurred by our global corporate functions in connection with shared services provided to the BSS and Digital Services segments.
Selling, general and administrative expenses were $100.1 million for the fiscal year ended January 31, 2014, a decrease of $18.6 million, or 15.6%, compared to the fiscal year ended January 31, 2013. The decrease was primarily attributable to a $14.7 million decrease in our general and administrative global functions and a $6.6 million decrease in personnel-related costs and employee sales commissions as we continue to execute on our cost reduction initiatives.
Other Operating Expenses
Other operating expenses were $10.8 million for the fiscal year ended January 31, 2014, an increase of $4.9 million, or 82.6%, compared to the fiscal year ended January 31, 2013. The increase was attributable to a $4.9 million increase in restructuring expenses. Restructuring expenses were higher due to the continued implementation of our fourth quarter 2012 initiatives following the Share Distribution. See note 10 of the consolidated and combined financial statements included in Item 15 of this Annual Report.
Loss from Operations
Loss from operations was $133.9 million for the fiscal year ended January 31, 2014, a decrease in loss of $17.8 million, or 11.7%, compared to the fiscal year ended January 31, 2013 due primarily to the reasons discussed above.
Segment Performance
Segment performance was a $118.1 million loss for the fiscal year ended January 31, 2014, a decrease in loss of $18.8 million, or 13.7%, compared to the fiscal year ended January 31, 2013. The decrease in loss was attributable to a decrease in segment expenses.

46

Fiscal Year Ended January 31, 2013 Compared to Fiscal Year Ended January 31, 2012
Consolidated and Combined Results
 
Fiscal Years Ended January 31,
 
Change
 
2013
 
2012
 
Amount
 
Percent
 
(Dollars in thousands, except per share data)
Total revenue
$
677,763

 
$
771,157

 
$
(93,394
)
 
(12.1
)%
Costs and expenses
 
 
 
 
 
 
 
Cost of revenue
431,644

 
468,867

 
(37,223
)
 
(7.9
)%
Research and development, net
76,461

 
94,238

 
(17,777
)
 
(18.9
)%
Selling, general and administrative
160,340

 
175,882

 
(15,542
)
 
(8.8
)%
Other operating expenses
11,510

 
20,728

 
(9,218
)
 
(44.5
)%
Total costs and expenses
679,955

 
759,715

 
(79,760
)
 
(10.5
)%
(Loss) income from operations
(2,192
)
 
11,442

 
(13,634
)
 
(119.2
)%
Interest income
829

 
1,755

 
(926
)
 
(52.8
)%
Interest expense
(901
)
 
(953
)
 
52

 
(5.5
)%
Interest expense on notes payable to CTI
(455
)
 
(409
)
 
(46
)
 
11.2
 %
Other expense, net
(4,049
)
 
(7,192
)
 
3,143

 
(43.7
)%
Income tax expense
(13,526
)
 
(25,291
)
 
11,765

 
(46.5
)%
Net loss from continuing operations
(20,294
)
 
(20,648
)
 
354

 
(1.7
)%
Income from discontinued operations, net of tax
26,542

 
7,761

 
18,781

 
242.0
 %
Net income (loss)
6,248

 
(12,887
)
 
19,135

 
(148.5
)%
Less: Net income attributable to noncontrolling interest
(1,167
)
 
(2,574
)
 
1,407

 
(54.7
)%
Net income (loss) attributable to Comverse, Inc.
$
5,081

 
$
(15,461
)
 
$
20,542

 
(132.9
)%
Net income (loss) attributable to Comverse, Inc.:
 
 
 
 
 
 
 
Net loss from continuing operations
$
(20,294
)
 
$
(20,648
)
 
$
354

 
 
Income from discontinued operations, net of tax
25,375

 
5,187

 
20,188

 
 
Net income (loss) attributable to Comverse, Inc.
$
5,081

 
$
(15,461
)
 
$
20,542

 
 
Earnings (loss) per share attributable to Comverse, Inc.’s stockholders:
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per share(1)
 
 
 
 
 
 
 
Continuing operations
$
(0.93
)
 
$
(0.94
)
 
$
0.01

 
 
Discontinued operations
$
1.16

 
$
0.23

 
$
0.93

 
 
(1) The computation of basic and diluted earnings (loss) per share for the fiscal year ended January 31, 2012 is calculated using the number of shares of outstanding common stock on October 31, 2012, the completion date of the Share Distribution. See note 17 to the consolidated and combined financial statements included in Item 15 of this Annual Report.
Total Revenue
Revenue from customer solutions was $401.0 million for the fiscal year ended January 31, 2013, a decrease of $47.8 million, or 10.7%, compared to the fiscal year ended January 31, 2012. The decrease was attributable to a decline of $71.2 million in customer solutions revenue in the BSS segment, partially offset by an increase of $23.4 million in the Digital Services segment. Revenue recognized using the percentage-of-completion method was $144.4 million and $182.0 million for the fiscal years ended January 31, 2013 and 2012, respectively.
Maintenance revenue was $276.8 million for the fiscal year ended January 31, 2013, a decrease of $45.6 million, or 14.1%, compared to the fiscal year ended January 31, 2012. This decrease was primarily attributable to declines of $24.2 million and $21.4 million in maintenance revenue in the Digital Services and BSS segments, respectively.
Revenue by Geographic Region
Revenue in the Americas, APAC and EMEA represented approximately 35%, 28% and 37% of our revenue, respectively, for the fiscal year ended January 31, 2013 compared to approximately 25%, 25% and 50% of our revenue, respectively, for the fiscal year ended January 31, 2012.

47

Foreign Currency Impact on Revenue
Our functional currency for financial reporting purposes is the U.S. dollar. The majority of our revenue for the fiscal year ended January 31, 2013 was derived from transactions denominated in U.S. dollars. All other revenue was derived from transactions denominated in various foreign currencies, primarily the British pound, euro and Japanese yen. For the fiscal year ended January 31, 2013, fluctuations in the U.S. dollar relative to foreign currencies in which we conducted business unfavorably impacted revenue by $8.2 million compared to the fiscal year ended January 31, 2012, primarily due to a $6.9 million unfavorable impact of the Euro.
Foreign Currency Impact on Costs
A significant portion of our expenses, principally personnel-related costs, is incurred in NIS, whereas our functional currency for financial reporting purposes is the U.S. dollar. A strengthening of the NIS against the U.S. dollar would increase the U.S. dollar value of our expenses in Israel. In order to mitigate this risk we enter into foreign currency forward contracts to hedge foreign currency exchange rate fluctuations.
For the fiscal year ended January 31, 2013, fluctuations in the U.S. dollar relative to all foreign currencies in which we conducted business favorably impacted costs by $9.3 million compared to the fiscal year ended January 31, 2012, primarily due to a weakening of the NIS against the U.S. dollar, net of hedging activity, resulting in a $4.6 million favorable impact.
Cost of Revenue
Cost of revenue was $431.6 million for the fiscal year ended January 31, 2013, a decrease of $37.2 million, or 7.9%, compared to the fiscal year ended January 31, 2012. The decrease was attributable to declines in costs of $34.1 million and $9.8 million in the BSS and Digital Services segments, respectively, partially offset by a $6.7 million increase at All Other.
Research and Development, Net
Research and development expenses, net were $76.5 million for the fiscal year ended January 31, 2013, a decrease of $17.8 million, or 18.9%, compared to the fiscal year ended January 31, 2012. The decrease was primarily attributable to a decline of $18.0 million and $1.5 million in the BSS segment and All Other, respectively, partially offset by an increase of $1.8 million in the Digital Services segment.
Selling, General and Administrative
Selling, general and administrative expenses were $160.3 million for the fiscal year ended January 31, 2013, a decrease of $15.5 million, or 8.8%, compared to the fiscal year ended January 31, 2012. The decrease was primarily attributable to declines of $7.5 million, $5.6 million and $2.4 million at All Other and in the Digital Services and BSS segments, respectively.
Other Operating Expenses
Other operating expenses were $11.5 million for the fiscal year ended January 31, 2013, a decrease of $9.2 million, or 44.5% compared to the fiscal year ended January 31, 2012. The decrease was attributable to a decline $14.8 million at All Other, partially offset by an increase $5.6 million in the BSS segment.
(Loss) Income from Operations
Loss from operations was $2.2 million for the fiscal year ended January 31, 2013, a change of $13.6 million compared to income from operations of $11.4 million for the fiscal year ended January 31, 2012. The decrease was primarily attributable to a decrease in income from operations of $43.6 million in the BSS segment, partially offset by a decrease in loss from operations of $17.1 million at All Other and an increase in income from operations of $12.9 million in the Digital Services segment.
Interest Income
Interest income was $0.8 million for the fiscal year ended January 31, 2013, a decrease of 52.8%, compared to the fiscal year ended January 31, 2012. The decrease was primarily attributable to a decrease in interest rates.

48

Interest Expense
Interest expense was $0.9 million for the fiscal year ended January 31, 2013, a decrease of $0.1 million, or 5.5%, compared to the fiscal year ended January 31, 2012.
Interest Expense on Notes Payable to CTI
Interest expense on notes payable to CTI consists of interest expense that was payable by us to CTI prior to the Share Distribution under a promissory note dated January 11, 2011 and a revolving loan agreement dated May 9, 2012 (referred to as the loan agreement).
Interest expense on notes payable to CTI was $0.5 million and $0.4 million for the fiscal years ended January 31, 2013 and 2012, respectively. For more information about this note and the loan agreement, see note 11 of the consolidated and combined financial statements included in Item 15 of this Annual Report.
Income Tax Expense
Income tax expense from continuing operations was $13.5 million for the fiscal year ended January 31, 2013, representing an effective tax rate of (199.9)%, compared to income tax expense from continuing operations of $25.3 million, representing an effective tax rate of 544.7% for the fiscal year ended January 31, 2012. During the fiscal year ended January 31, 2013 the effective tax rate was less than the U.S. federal statutory rate of 35%. During the fiscal year ended January 31, 2013, the effective tax rate was negative and during the fiscal year ended January 31, 2012, the effective tax rate was higher than the U.S federal statutory rate of 35% primarily due to the mix of income and losses by jurisdiction and because we did not record an income tax benefit on losses in certain jurisdictions in which we maintain valuation allowances against certain of our U.S. and foreign net deferred tax assets. The income tax expense from continuing operations for the period is comprised primarily of income tax expense recorded in non-loss jurisdictions, withholding taxes, and certain tax contingencies recorded in the fiscal years ended January 31, 2013 and 2012.
The change in our effective tax rate for the fiscal year ended January 31, 2013, compared to the fiscal year ended January 31, 2012 was primarily attributable to the receipt of interest income on an Israeli tax refund of $6.5 million and changes in the relative mix of income and losses across various jurisdictions.
Income from Discontinued Operations, Net of Tax
Income from discontinued operations represents the results of operations of Starhome, including the gain on sale of Starhome, net of tax.
Income from discontinued operations, net of tax, was $26.5 million for the fiscal year ended January 31, 2013, compared to $7.8 million for the fiscal year ended January 31, 2012. The increase was primarily attributable to $22.6 million gain on sale of Starhome recorded during the fiscal year ended January 31, 2013. See note 16 of the consolidated and combined financial statements included in Item 15 of this Annual Report.
Net Income (Loss)
Net income was $6.2 million for the fiscal year ended January 31, 2013, a change of $19.1 million compared to a net loss of $12.9 million for the fiscal year ended January 31, 2012 due primarily to the reasons discussed above.
Net Income Attributable to Noncontrolling Interest
Net income attributable to noncontrolling interest was $1.2 million for the fiscal year ended January 31, 2013, a decrease of $1.4 million, or 54.7%, compared to the fiscal year ended January 31, 2012. The decrease was attributable to a decrease in Starhome's net income for the fiscal year ended January 31, 2013 compared to the fiscal year ended January 31, 2012.


49

Segment Results
BSS
 
Fiscal Years Ended January 31,
 
Change
 
2013
 
2012
 
Amount
 
Percent
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Total revenue
$
295,803

 
$
388,350

 
$
(92,547
)
 
(23.8
)%
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
197,401

 
231,511

 
(34,110
)
 
(14.7
)%
Research and development, net
39,308

 
57,308

 
(18,000
)
 
(31.4
)%
Selling, general and administrative
34,814

 
37,261

 
(2,447
)
 
(6.6
)%
Other operating expenses
5,605

 
—

 
5,605

 
N/M

Total costs and expenses
277,128

 
326,080

 
(48,952
)
 
(15.0
)%
Income from operations
$
18,675

 
$
62,270

 
$
(43,595
)
 
(70.0
)%
Computation of segment performance:
 
 
 
 
 
 
 
Segment revenue
$
295,803

 
$
388,350

 
$
(92,547
)
 
(23.8
)%
Total costs and expenses
$
277,128

 
$
326,080

 
$
(48,952
)
 
(15.0
)%
Segment expense adjustments:
 
 
 
 
 
 
 
Amortization of intangible assets
14,124

 
17,308

 
(3,184
)
 
(18.4
)%
Compliance-related compensation and other expenses
877

 
2,447

 
(1,570
)
 
(64.2
)%
Impairment of goodwill
5,605

 
—

 
5,605

 
N/M

Impairment of property and equipment
2

 
390

 
(388
)
 
(99.5
)%
Segment expense adjustments
20,608

 
20,145

 
463

 
2.3
 %
Segment expenses
256,520

 
305,935

 
(49,415
)
 
(16.2
)%
Segment performance
$
39,283

 
$
82,415

 
$
(43,132
)
 
(52.3
)%
Revenue
Revenue from BSS customer solutions was $157.5 million for the fiscal year ended January 31, 2013, a decrease of $71.2 million, or 31.1%, compared to the fiscal year ended January 31, 2012. The decrease in revenue for the current fiscal year compared to the prior fiscal year was partially attributable to a $29.8 million decrease in revenue recognized from material modifications of certain existing contracts as a result of the adoption of the new accounting guidance during the fiscal year ended January 31, 2012. The remaining decrease in revenue from BSS customer solutions was primarily attributable to changes in scope and settlements of certain customer contracts. Revenue from BSS customer solutions continued to be adversely affected by (i) the increasing complexity of project deployment resulting in extended periods of time required to complete project milestones and receive customer acceptance and (ii) lower volume of BSS projects in the current fiscal year resulting from lower product bookings levels in recent years.
BSS maintenance revenue was $138.3 million for the fiscal year ended January 31, 2013, a decrease of $21.4 million, or 13.4%, compared to the fiscal year ended January 31, 2012. The decrease was primarily attributable to (i) timing of entering into renewals of maintenance contracts with customers, (ii) decreased collections from customers for whom revenue is recognized upon collection and (iii) maintenance contracts that were terminated in the current year.
Revenue by Geographic Region
Revenue in the Americas, APAC and EMEA represented approximately 25%, 27% and 48% of BSS's revenue, respectively, for the fiscal year ended January 31, 2013 compared to approximately 21%, 27% and 52% of BSS's revenue, respectively, for the fiscal year ended January 31, 2012.
Europe continued to suffer from significant weakness in market conditions and, accordingly, European customers continued to closely monitor their costs and maintain lower levels of spending. As a result, BSS's revenue from its European customers declined during the fiscal year ended January 31, 2013 compared to the fiscal year ended January 31, 2012.

50

Foreign Currency Impact on Revenue
For the fiscal year ended January 31, 2013, fluctuations in the U.S. dollar relative to foreign currencies in which BSS conducted business compared to the fiscal year ended January 31, 2012 unfavorably impacted revenue by $6.6 million primarily due to a $3.8 million unfavorable impact of the euro and $1.7 million unfavorable impact of the Brazilian Real.
Cost of Revenue
Cost of revenue was $197.4 million for the fiscal year ended January 31, 2013, a decrease of $34.1 million, or 14.7%, compared to the fiscal year ended January 31, 2012, resulting in a decrease in gross margin of $58.4 million. The decrease in gross margin was primarily attributable to:
•
a $37.4 million decrease due to decreased revenue;
•
a $2.8 million decrease in amortization of intangible assets due to certain intangible assets becoming fully amortized; and
•
a $16.9 million decrease primarily due to several project and commercial issues related to changes in scope and settlements for our Comverse ONE implementations in the fiscal year ended January 31, 2013.     
The change in profit estimate of a BSS contract accounted for under the percentage of completion method negatively impacted income from operations by $14.8 million during the fiscal year ended January 31, 2013.
Research and Development, Net
Research and development expenses, net, were $39.3 million for the fiscal year ended January 31, 2013, a decrease of $18.0 million, or 31.4%, compared to the fiscal year ended January 31, 2012. The decrease was primarily attributable to a $20.0 million decrease in personnel-related costs and associated overhead allocated costs principally due to workforce reductions as part of the Phase II Business Transformation in the prior year.
Selling, General and Administrative
Selling, general and administrative expenses were $34.8 million for the fiscal year ended January 31, 2013, a decrease of $2.4 million, or 6.6%, compared to the fiscal year ended January 31, 2012. The decrease was primarily attributable to:
•
a $5.9 million decrease in personnel-related costs and associated allocated costs and employee sales commissions principally due to workforce reductions as part of the Phase II Business Transformation in the prior year; and
•
a $1.0 million decrease in bad debt expense related to specific customers in the prior year.
These decreases were partially offset by a $5.5 million increase in agent commissions due to the mix of bookings generated from certain projects and in certain geographic locations.
Segment Performance
Segment performance was $39.3 million for the fiscal year ended January 31, 2013 based on segment revenue of $295.8 million, representing a segment performance margin of 13.3% as a percentage of segment revenue. Segment performance was $82.4 million for the fiscal year ended January 31, 2012 based on segment revenue of $388.4 million, representing a segment performance margin of 21.2% as a percentage of segment revenue. The decrease in segment performance margin was primarily attributable to the decrease in segment revenue partially offset by the decrease in segment expenses for the fiscal year ended January 31, 2013 compared to the fiscal year ended January 31, 2012.


51

Digital Services
 
 
Fiscal Years Ended January 31,
 
Change
 
2013
 
2012
 
Amount
 
Percent
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Total revenue
$
378,918

 
$
379,714

 
$
(796
)
 
(0.2
)%
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
206,807

 
216,619

 
(9,812
)
 
(4.5
)%
Research and development, net
34,382

 
32,621

 
1,761

 
5.4
 %
Selling, general and administrative
6,839

 
12,438

 
(5,599
)
 
(45.0
)%
Total costs and expenses
248,028

 
261,678

 
(13,650
)
 
(5.2
)%
Income from operations
$
130,890

 
$
118,036

 
$
12,854

 
10.9
 %
Computation of segment performance:
 
 
 
 
 
 
 
Segment revenue
$
378,918

 
$
379,714

 
$
(796
)
 
(0.2
)%
Total costs and expenses
$
248,028

 
$
261,678

 
$
(13,650
)
 
(5.2
)%
Segment expense adjustments:
 
 
 
 
 
 
 
Compliance-related compensation and other expenses
2,314

 
2,205

 
109

 
4.9
 %
Impairment of property and equipment
—

 
741

 
(741
)
 
(100.0
)%
Certain litigation settlements and related costs
(151
)
 
—

 
(151
)
 
N/M

Other
—

 
19

 
(19
)
 
(100.0
)%
Segment expense adjustments
2,163

 
2,965

 
(802
)
 
(27.0
)%
Segment expenses
245,865

 
258,713

 
(12,848
)
 
(5.0
)%
Segment performance
$
133,053

 
$
121,001

 
$
12,052

 
10.0
 %
Revenue
Revenue from Digital Services customer solutions was $240.4 million for the fiscal year ended January 31, 2013, an increase of $23.4 million, or 10.8%, compared to the fiscal year ended January 31, 2012. The increase in revenue from Digital Services customer solutions was primarily attributable to an increase in the amount of revenue from percentage-of-completion projects and an increase in the number of customer acceptances in large-scale deployments of next generation voicemail products (including visual voicemail) during the fiscal year ended January 31, 2013 with no comparable customer acceptances in the fiscal year ended January 31, 2012.
Digital Services maintenance revenue was $138.6 million for the fiscal year ended January 31, 2013, a decrease of $24.2 million, or 14.9%, compared to the fiscal year ended January 31, 2012. The decrease was primarily attributable to the reduction and termination of several maintenance contracts and a decrease in maintenance revenue attributable to maintenance services provided to customers during the initial service period.
Revenue by Geographic Region
Revenue in the Americas, APAC and EMEA represented approximately 42%, 29% and 29% of Digital Services revenue, respectively, for the fiscal year ended January 31, 2013 compared to approximately 28% 25% and 47% of Digital Services revenue, respectively, for the fiscal year ended January 31, 2012.
The increase in revenue as a percentage of total revenue for Digital Services in the Americas was primarily attributable to significant revenue recognized due to customer acceptances in certain large-scale projects in the fiscal year ended January 31, 2013, with no comparable customer acceptances in the fiscal year ended January 31, 2012. Conversely, the decrease in revenue as a percentage of total revenue for Digital Services in Europe was primarily attributable to significant revenue recognized due to customer acceptances in certain large-scale projects and settlements in the fiscal year ended January 31, 2012, with no comparable customer acceptances in the fiscal year ended January 31, 2013. The increase in revenue for Digital Services in APAC was primarily attributable to revenue recognized upon cash collection due to increased collections from certain customers.

52

Foreign Currency Impact on Revenue
For the fiscal year ended January 31, 2013, fluctuations in the U.S. dollar relative to foreign currencies in which Digital Services conducted business compared to the fiscal year ended January 31, 2012 unfavorably impacted revenue by $2.1 million primarily due to a $3.1 million unfavorable impact of the euro offset by a $1.0 million favorable impact of the Japanese yen.
Cost of Revenue
Cost of revenue was $206.8 million for the fiscal year ended January 31, 2013, a decrease of $9.8 million, or 4.5%, compared to the fiscal year ended January 31, 2012. The decrease was primarily attributable to the mix in revenue, as a larger percentage of the revenue in the fiscal year ended January 31, 2013 came from higher margin projects.
Research and Development, Net
Research and development expenses, net were $34.4 million for the fiscal year ended January 31, 2013, an increase of $1.8 million, or 5.4%, compared to the fiscal year ended January 31, 2012. The increase was primarily attributable to a $3.0 million increase in personnel-related costs mainly due to increased research and development headcount attributable to the launch of SEM and IP Messaging. The increase was offset by a decrease of $1.6 million in personnel-related costs due to allocation of research and development personnel to specific revenue generating projects recorded in cost of revenue in lieu of research and development expenses, net.
Selling, General and Administrative
Selling, general and administrative expenses were $6.8 million for the fiscal year ended January 31, 2013, a decrease of $5.6 million, or 45.0%, compared to the fiscal year ended January 31, 2012. The decrease was primarily attributable to:
•
a $3.1 million decrease in bad debt expenses that related to a specific customer in the prior year; and
•
a $2.4 million decrease in agent sales commissions expense principally due to the mix of bookings generated from certain projects and in certain geographic locations.
Segment Performance
Segment performance was $133.1 million for the fiscal year ended January 31, 2013 based on segment revenue of $378.9 million, representing a segment performance margin of 35.1% as a percentage of segment revenue. Segment performance was $121.0 million for the fiscal year ended January 31, 2012 based on segment revenue of $379.7 million, representing a segment performance margin of 31.9% as a percentage of segment revenue.


53

All Other
 
Fiscal Years Ended January 31,
 
Change
 
2013
 
2012
 
Amount
 
Percent
 
(Dollars in thousands)
Revenue:
 
 
 
 
 
 
 
Total revenue
$
3,042

 
$
3,093

 
$
(51
)
 
(1.6
)%
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
27,436

 
20,737

 
6,699

 
32.3
 %
Research and development, net
2,771

 
4,309

 
(1,538
)
 
(35.7
)%
Selling, general and administrative
118,687

 
126,183

 
(7,496
)
 
(5.9
)%
Other operating expenses
5,905

 
20,728

 
(14,823
)
 
(71.5
)%
Total costs and expenses
154,799

 
171,957

 
(17,158
)
 
(10.0
)%
Loss from operations
$
(151,757
)
 
$
(168,864
)
 
$
17,107

 
(10.1
)%
Computation of segment performance:
 
 
 
 
 
 
 
Segment revenue
$
3,042

 
$
3,093

 
$
(51
)
 
(1.6
)%
Total costs and expenses
$
154,799

 
$
171,957

 
$
(17,158
)
 
(10.0
)%
Segment expense adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense
7,517

 
3,660

 
3,857

 
105.4
 %
Compliance-related professional fees
245

 
10,901

 
(10,656
)
 
(97.8
)%
Compliance-related compensation and other expenses
(1,093
)
 
2,067

 
(3,160
)
 
(152.9
)%
Strategic evaluation related costs
933

 
—

 
933

 
N/M

Impairment of property and equipment
402

 
1,200

 
(798
)
 
(66.5
)%
Certain litigation settlements and related costs
(509
)
 
804

 
(1,313
)
 
N/M

Restructuring expenses
5,905

 
20,728

 
(14,823
)
 
(71.5
)%
Gain on sale of fixed assets
(185
)
 
—

 
(185
)
 
N/M

Other
1,621

 
(67
)
 
1,688

 
N/M

Segment expense adjustments
14,836

 
39,293

 
(24,457
)
 
(62.2
)%
Segment expenses
139,963

 
132,664

 
7,299

 
5.5
 %
Segment performance
$
(136,921
)
 
$
(129,571
)
 
$
(7,350
)
 
5.7
 %
Revenue
Revenue was $3.0 million for the fiscal year ended January 31, 2013, a decrease of $0.1 million, or 1.6%, compared to the fiscal year ended January 31, 2012.
Cost of Revenue
Cost of revenue was $27.4 million for the fiscal year ended January 31, 2013, an increase of $6.7 million, or 32.3%, compared to the fiscal year ended January 31, 2012. The increase was primarily attributable to a $5.0 million change in inventory write-offs.
Research and Development, Net
Research and development expenses, net, were negative $2.8 million for the fiscal year ended January 31, 2013, a decrease of $1.5 million, or 35.7%, compared to the fiscal year ended January 31, 2012. The decrease was primarily due to a $1.4 million decrease in personnel-related and associated allocated costs.
Selling, General and Administrative
Selling, general and administrative expenses were $118.7 million for the fiscal year ended January 31, 2013, a decrease of $7.5 million, or 5.9%, compared to the fiscal year ended January 31, 2012. The increase was primarily attributable to:
•
a $10.7 million decrease in compliance-related professional fees in connection with CTI's efforts to become current in its periodic reporting obligations under the federal securities laws; and
•
a $2.1 million increase in stock compensation expense.
These decreases were partially offset by:

54

•
a $2.9 million increase in personnel-related costs in the sales and marketing departments due to an increase in headcount; and
•
a $2.2 million increase in employee sales commissions due to stronger sales performance in the fiscal year ended January 31, 2012.
Other Operating Expenses
Other operating expenses were $5.9 million for the fiscal year ended January 31, 2013, a decrease of $14.8 million, or 71.5%, compared to the fiscal year ended January 31, 2012. The decrease was attributable to a $14.8 million decrease in restructuring expenses. Restructuring expenses were higher during the prior year due to the implementation of the Phase II Business Transformation plan and restructuring activities related to Netcentrex.
Loss from Operations
Loss from operations was $151.8 million for the fiscal year ended January 31, 2013, a decrease in loss of $17.1 million, or 10.1%, compared to the fiscal year ended January 31, 2012 due primarily to the reasons discussed above.
Segment Performance
Segment performance was a $136.9 million loss for the fiscal year ended January 31, 2013, an increase in loss of $7.4 million, or 5.7%, compared to the fiscal year ended January 31, 2012. The increase in net loss was primarily attributable to an increase in cost of revenue expenses as described above.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our principal sources of liquidity historically have consisted of cash and cash equivalents, cash flows from operations, including changes in working capital, borrowings from CTI, and the sale of investments and assets. We believe that our future sources of liquidity will include cash and cash equivalents and cash flows from operations, and may include new borrowings, or proceeds from the issuance of equity or debt securities.
During the fiscal year ended January 31, 2014, our principal uses of liquidity were to fund operating expenses, implement restructuring initiatives and make capital expenditures. In addition, we expended resources and made investments to improve our internal control over financial reporting through the hiring of additional experienced finance and accounting personnel, redesigning of processes, implementing accounting and finance systems and performing additional business analytics. These expenses declined significantly for the fiscal year ended January 31, 2014 compared to the fiscal year ended January 31, 2013. Following the Share Distribution, we did not incur expenses in connection with CTI’s periodic reporting requirements. However, following the Share Distribution, our accounting, tax and legal fees associated with compliance with our periodic reporting obligations under, federal securities laws and maintenance of internal control over financial reporting increased.
Financial Condition
Cash and Cash Equivalents and Restricted Cash
As of January 31, 2014, we had cash, cash equivalents, bank time deposits and restricted cash of approximately $322.7 million, compared to approximately $305.4 million as of January 31, 2013. In connection with the completion of the Verint Merger Agreement on February 4, 2013, CTI placed $25.0 million in escrow to support indemnification claims to the extent made against us by Verint as discussed below, and a $10.9 million Italian VAT refund received on April 30, 2013. During the fiscal year ended January 31, 2014 in connection with our restructuring initiatives we made approximately $10.2 million in restructuring payments, which were primarily severance-related.
Restricted Cash
Restricted cash short-term and long-term aggregated $68.2 million and $42.5 million as of January 31, 2014 and January 31, 2013, respectively. Restricted cash includes compensating cash balances related to existing lines of credit and deposits that are pledged as collateral or restricted for use specified performance guarantees to customers and vendors, letters of credit, indemnification claims, foreign currency transactions in the ordinary course of business and pending tax judgments.
On February 4, 2013, in connection with the closing of the Verint Merger, CTI placed $25.0 million in escrow to support indemnification claims to the extent made against us by Verint and any cash balance remaining in such escrow

55

fund 18 months after the closing of the Verint Merger, less any claims made on or prior to such date, will be released to us. Although no indemnification claims have been filed and the Escrow Release Date is within 12 months of January 31, 2014, we continue to classify the restricted cash balance as "Long-term restricted cash" in the Consolidated Balance Sheets until it can be determined if any future claims would restrict the release of such escrow funds.
Common Stock Repurchase
Our Board of Directors has adopted a program to repurchase from time to time at management’s discretion up to $30 million in shares of our common stock on the open market during the 18-month period ending October 9, 2015 at prevailing market prices. Repurchases will be made under the program using our own cash resources.
Liquidity Forecast
We currently forecast that available cash and cash equivalents will be sufficient to meet our liquidity needs, including capital expenditures, for at least the next 12 months.
Management’s current forecast is based upon a number of assumptions, including, among others: assumed levels of customer order activity, revenue and collections; continued implementation of initiatives to reduce operating costs; no significant degradation in operating margins; increased spending on certain investments in the business; slight reductions in the unrestricted cash levels required to support the working capital needs of the business and other professional fees; intra-quarter working capital fluctuations consistent with historical trends; and assumed levels of repurchases of our common stock. Management believes that the above-noted assumptions are reasonable. However, should one or more of the assumptions prove incorrect, or should one or more of the risks or uncertainties described in Item 1A, “Risk Factors” materialize, we may experience a shortfall in the cash required to support working capital needs.
Capital Expenditures
During the fiscal year ended January 31, 2014, we commenced our plan to make investments relating to upgrades of systems and tools that we believe will increase operational efficiency and result in cost reductions in future fiscal periods. As part of this initiative, we plan to make significant additional investments in the fiscal years ending January 31, 2015 and 2016. In addition, we plan to make capital expenditures in respect of leasehold improvements related to our new facility in Ra'anana, Israel and other planned office moves. We currently expect that the aggregate amount of the capital expenditure for these upgrades of systems and tools and leasehold improvements to be made during the next two fiscal years should range between $30.0 million to $35.0 million, the exact timing of which is subject to numerous factors. In addition, we have typically had annual capital expenditures between $5.0 million to $8.0 million that would be in addition to the above items.
Sources of Liquidity
The following is a discussion that highlights our primary sources of liquidity, cash and cash equivalents, and changes in those amounts due to operations, financing, and investing activities and the liquidity of our investments.
Cash Flows
Fiscal Year Ended January 31, 2014 Compared to Fiscal Year Ended January 31, 2013
 
Fiscal Year Ended January 31,
 
2014
 
2013
 
(In thousands)
Net cash provided by operating activities - continuing operations
$
6,621

 
$
28,190

Net cash used in operating activities - discontinued operations
—

 
(1,277
)
Net cash used in investing activities
(38,297
)
 
(4,482
)
Net cash provided by financing activities
25,118

 
49,252

Effects of exchange rates on cash and cash equivalents
(1,783
)
 
(1,954
)
Net (decrease) increase in cash and cash equivalents
(8,341
)
 
69,729

Cash and cash equivalents, beginning of period including cash of discontinued operations
262,921

 
193,192

Cash and cash equivalents, end of period
$
254,580

 
$
262,921


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Operating Cash Flows
Net cash provided by operating activities from continuing operations was $6.6 million during the fiscal year ended January 31, 2014, a decrease of $20.3 million compared to the fiscal year ended January 31, 2013. This decrease was primarily attributable to:
•
a decrease of $25.8 million in deferred revenue mainly due to revenue recognition being higher than invoicing for the twelve months ended January 31, 2014 when compared to the twelve months ended January 31, 2013; and
•
a decrease of $41.9 million in tax contingencies as a result of revaluation of uncertain tax position liabilities.
These decreases were partially offset by increases in net income and non-cash items of $49.2 million, which includes a $10.9 million VAT refund received in fiscal 2013.
Investing Cash Flows
Net cash used in investing activities was $38.3 million during the fiscal year ended January 31, 2014, an increase in cash used of $33.8 million compared to the fiscal year ended January 31, 2013. The increase in cash used was attributable to a $22.2 million increase in restricted cash mainly due to $25.0 million in bank time deposits received from CTI in connection with the closing of the Verint Merger, a $6.9 million increase in cash used for purchases of property and equipment and $6.3 million in net proceeds received from the sale of Starhome in the fiscal year ended January 31, 2013.
Financing Cash Flows
Net cash used in financing activities was $25.1 million during the fiscal year ended January 31, 2014, a decrease in cash provided by financing activities of $24.1 million compared to the fiscal year ended January 31, 2013. The decrease was primarily attributable to a $38.5 million cash capital contribution from CTI and $9.5 million of borrowings under the note payable to CTI during the fiscal year ended January 31, 2013, compared to a $25.0 million cash capital contribution from CTI during the fiscal year ended January 31, 2014.
Effects of Exchange Rates on Cash and Cash Equivalents
The majority of our cash and cash equivalents are denominated in U.S. dollars. However, due to the nature of our global business, we also hold cash denominated in other currencies, primarily the Euro, the NIS and the British pound. For the fiscal year ended January 31, 2014, the fluctuation in foreign currency exchange rates had an unfavorable impact of $1.8 million on cash and cash equivalents.
Fiscal Year Ended January 31, 2013 Compared to Fiscal Year Ended January 31, 2012
 
 
Fiscal Years Ended January 31,
 
2013
 
2012
 
(In thousands)
Net cash used in (provided by) operating activities - continuing operations
28,190

 
(13,361
)
Net cash (used in) provided by operating activities - discontinued operations
(1,277
)
 
11,807

Net cash used in investing activities
(4,482
)
 
(8,735
)
Net cash provided by (used in) financing activities
49,252

 
(12,417
)
Effects of exchange rates on cash and cash equivalents
(1,954
)
 
2,860

Net increase (decrease) in cash and cash equivalents
69,729

 
(19,846
)
Cash and cash equivalents, beginning of year including cash of discontinued operations
193,192

 
213,038

Cash and cash equivalents, end of year including cash of discontinued operations
262,921

 
193,192

Less: Cash and cash equivalents of discontinued operations, end of year
—

 
(32,466
)
Cash and cash equivalents, end of year
$
262,921

 
$
160,726


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Operating Cash Flows
During the fiscal year ended January 31, 2013, net cash of $28.2 million was provided by operating activities from continuing operations. Net cash provided by operating activities from continuing operations was primarily attributable to:
•
a $36.1 million decrease in deferred cost of revenue;
•
a $35.9 million increase in accounts payable and accrued expenses;
•
a $20.8 million of net income after non-cash charges add-back;
•
a $14.9 million decrease in prepaid expense and other current assets; and
•
a $9.5 million decrease in accounts receivable.
Cash provided by operating activities was partially offset by a $85.0 million decrease in deferred revenue.
Investing Cash Flows
During the fiscal year ended January 31, 2013, net cash used in investing activities was $4.5 million. Net cash used in investing activities was primarily attributable to a $4.7 million increase in restricted cash and bank time deposits and $5.4 million of cash used for purchases of property and equipment partially offset by $6.3 million in proceeds from the sale of Starhome.
Financing Cash Flows
During the fiscal year ended January 31, 2013, net cash provided by financing activities was $49.3 million. Net cash provided by financing activities was primarily attributable to a $38.5 million cash capital contribution from CTI and $9.5 million of borrowings under the note payable to CTI.
Effects of Exchange Rates on Cash and Cash Equivalents
The majority of our cash and cash equivalents is denominated in U.S. dollars. However, due to the nature of our global business, we also hold cash denominated in other currencies, primarily the euro, the NIS and the British pound. For the fiscal year ended January 31, 2013, the fluctuation in foreign currency exchange rates had an unfavorable impact of $2.0 million on cash and cash equivalents.
Sale of Starhome
On August 1, 2012, CTI, certain other Starhome shareholders and Starhome entered into the Starhome Share Purchase Agreement with Fortissimo pursuant to which Fortissimo agreed to purchase all of the outstanding share capital of Starhome as part of the Starhome Disposition. On September 19, 2012, CTI, in order to ensure it could meet the conditions of the Verint Merger, contributed to us its interest in Starhome, including its rights and obligations under the Starhome Share Purchase Agreement. The Starhome Disposition was completed on October 19, 2012.
Under the terms of the Starhome Share Purchase Agreement, Starhome's shareholders received aggregate cash proceeds of approximately $81.3 million, subject to adjustment for fees, transaction expenses and certain taxes. Of this amount, $10.5 million is held in escrow to cover potential post-closing indemnification claims, with $5.5 million being released after 18 months and the remainder released after 24 months, in each case, less any claims made on or prior to such dates. We received aggregate net cash consideration (including $4.9 million deposited in escrow at closing) of approximately $37.2 million, after payments that CTI agreed to make to certain other Starhome shareholders of approximately $4.5 million. The escrow funds are available to satisfy certain indemnification claims under the Starhome Share Purchase Agreement to the extent that such claims exceed $1.0 million. As of January 31, 2014, such claims have not exceeded the $1.0 million threshold.
Merger of CTI and Verint
Under the Share Distribution Agreements we and CTI entered into in connection with the Share Distribution, we have agreed to indemnify CTI and its affiliates (including Verint after the Verint Merger) against certain losses that may arise as a result of the Verint Merger and the Share Distribution. Certain of our indemnification obligations are capped at $25.0 million and certain are uncapped. CTI placed $25.0 million in escrow to support indemnification claims to the extent made against us by Verint and any cash balance remaining in such escrow fund 18 months after the closing of the Verint Merger, less any claims made on or prior to such date, will be released to us. The escrow funds cannot be used for claims related to the Israeli Optionholder suit. Although no indemnification claims have been filed and the Escrow Release Date is within 12 months of January 31, 2014, we continue to classify the restricted cash balance as "Long-term

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restricted cash" in the Consolidated Balance Sheets until it can be determined if any future claims would restrict the release of such escrow funds. We also assumed all pre-Share Distribution tax obligations of each of us and CTI. For more information, see note 3 to our consolidated and combined financial statements included in Item 15 of this Annual Report.
Indebtedness
Comverse Ltd. Lines of Credit
As of January 31, 2014 and 2013, Comverse Ltd., our wholly-owned Israeli subsidiary, had a $20.0 million line of credit with a bank to be used for various performance guarantees to customers and vendors, letters of credit and foreign currency transactions in the ordinary course of business. This line of credit is not available for borrowings. The line of credit bears no interest and is subject to renewal on an annual basis. Comverse Ltd. is required to maintain cash balances with the bank of no less than the capacity under the line of credit at all times regardless of amounts utilized under the line of credit. As of January 31, 2014 and 2013, Comverse Ltd. had utilized $20.0 million and $17.2 million, respectively, of capacity under the line of credit for guarantees and foreign currency transactions. In February 2014, Comverse Ltd. increased the line of credit from $20.0 million to $25.0 million with a corresponding increase in the cash balances Comverse Ltd. was required to maintain with the bank to $25.0 million.
As of January 31, 2014 and 2013, Comverse Ltd. had an additional line of credit with a bank for $8.0 million, to be used for borrowings, various performance guarantees to customers and vendors, letters of credit and foreign currency transactions in the ordinary course of business. The line of credit bears no interest other than on borrowings thereunder and is subject to renewal on an annual basis. Borrowings under the line of credit bear interest at an annual rate of London Interbank Offered Rate (or LIBOR) plus a variable margin determined based on the bank’s underlying cost of capital. Comverse Ltd. is required to maintain cash balances with the bank of no less than the capacity under the line of credit at all times regardless of amounts borrowed or utilized under the line of credit. As of January 31, 2014 and 2013, Comverse Ltd. had no outstanding borrowings under the line of credit. As of each of January 31, 2014 and 2013, Comverse Ltd. had utilized $8.0 million of capacity under the line of credit for guarantees and foreign currency transactions. In February 2014, Comverse Ltd. increased the additional line of credit from $8.0 million to $10.0 million with a corresponding increase in the cash balances Comverse Ltd. was required to maintain with the bank to $10.0 million.
Other than Comverse Ltd.’s requirement to maintain cash balances with the banks as discussed above, the lines of credit have no financial covenants. These cash balances required to be maintained with the banks were classified as “Restricted cash and bank time deposits” and “Long-term restricted cash” included within the consolidated balance sheets as of January 31, 2014 and 2013.
Restructuring Initiatives
We review our business, manage costs and align resources with market demand. As a result, we have taken several actions to improve our cash position, reduce fixed costs, eliminate redundancies, strengthen operational focus and better position us to respond to market pressures or unfavorable economic conditions. While such restructuring initiatives are expected to have positive impact on our operating cash flows in the long term, they also have led and will lead to some expenses. During the fiscal years ended January 31, 2014 and 2013, we recorded severance and facility-related costs attributable to existing restructuring initiatives of $10.8 million and $5.9 million, respectively, and paid $10.2 million and $4.0 million, respectively. The remaining severance and facility-related costs relating to existing restructuring initiatives of $1.1 million and $6.1 million are expected to be substantially paid by April, 2014 and October, 2019, respectively. For more information relating to our restructuring initiatives, including our financial obligations in respect thereof, see note 10 to the consolidated and combined financial statements included in Item 15 of this Annual Report.
We expect to commence certain initiatives in the fiscal year ended January 31, 2015, with a plan to further restructure our operations towards aligning operating costs and expenses with anticipated revenue. The restructuring plan is expected to include reduction of workforce included in cost of revenue, research and development and selling, general and administrative expenses. The aggregate cost of the plan is currently expected to be approximately $9.0 million primarily related to severance costs which is expected to be accrued and paid by January 31, 2015.

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Guarantees and Restrictions on Access to Subsidiary Cash
Guarantees
We provide certain customers in the ordinary course of business with financial performance guarantees, which in certain cases are backed by standby letters of credit or surety bonds, the majority of which are cash collateralized and accounted for as restricted cash and bank time deposits. We are only liable for the amounts of those guarantees in the event of our nonperformance, which would permit the customer to exercise the guarantee. As of January 31, 2014 and 2013, we believe that we were in compliance with our performance obligations under all contracts for which there is a financial performance guarantee, and that any liabilities arising in connection with these guarantees will not have a material adverse effect on our consolidated and combined results of operations, financial position or cash flows. We also obtained bank guarantees primarily to provide customer assurance relating to the performance of certain obligations required by customer agreements for the guarantee of certain payment obligations. These guarantees, which aggregated $33.4 million and $31.1 million as of January 31, 2014 and 2013, respectively, are generally scheduled to be released upon our performance of specified contract milestones, a majority of which are scheduled to be completed at various dates through December 31, 2015.
Dividends from Subsidiaries
The ability of our Israeli subsidiaries to pay dividends is governed by Israeli law, which provides that dividends may be paid by an Israeli corporation only out of earnings as defined in accordance with the Israeli Companies Law of 1999, provided that there is no reasonable concern that such payment will cause such subsidiary to fail to meet its current and expected liabilities as they come due.
Cash and cash equivalents held by foreign subsidiaries.
We operate our business internationally. A significant portion of our cash and cash equivalents is held by various foreign subsidiaries. As of January 31, 2014 and 2013, we had $97.2 million and $149.4 million or 38% and 57%, respectively, of our cash and cash equivalents held by our foreign subsidiaries. If cash and cash equivalents held outside the United States are distributed to the United States resident corporate parents in the form of dividends or otherwise, we may be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. We may incur substantial withholding taxes if we repatriate our cash from certain foreign subsidiaries. We expect a portion of our foreign subsidiaries cash to be repatriated to the U.S. As this amount has been previously subject to U.S. tax, the non-U.S. withholding taxes that would be imposed on an actual triggering of a dividend of $149.0 million has been accrued in the amount of $20.1 million.
OFF-BALANCE SHEET ARRANGEMENTS
As of January 31, 2014, we had no material off-balance sheet arrangements, other than performance guarantees disclosed in “—Liquidity and Capital Resources—Guarantees and Restrictions on Access to Subsidiary Cash—Guarantees” and except as disclosed in note 24 to the consolidated and combined financial statements included in Item 15 of this Annual Report. There were no material changes in our off-balance sheet arrangements since January 31, 2013.

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CONTRACTUAL OBLIGATIONS
The following table presents our contractual obligations as of January 31, 2014:
 
Payments due by period 
 
 
Total 
 
 
< 1 year 
 
 
1-3 years 
 
 
3-5 years 
 
 
> 5 years 
 
 
(In thousands)
Capital lease obligations
$
16

 
$
10

 
$
6

 
$
—

 
$
—

Operating lease obligations - real estate
78,772

 
17,420

 
21,127

 
12,969

 
27,256

Operating lease obligations - other (equipment, etc.)
338

 
218

 
120

 
—

 
—

Purchase obligations (1)(2)
16,199

 
11,527

 
4,672

 
—

 
—

     Other current and long-term liabilities
164

 
—

 
—

 
—

 
164

Total(3)
$
95,489

 
$
29,175

 
$
25,925

 
$
12,969

 
$
27,420

 
(1)
Purchase obligations include agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions, and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.
(2)
The purchase obligations set forth above, includes approximately $44.1 million in expected lease payments over a 10 year term for 218,912 square feet of leased office space in Ra'anana, Israel which is expected to be available in October, 2014.
(3)
Our consolidated balance sheet as of January 31, 2014 includes $90.3 million of non-current tax liabilities for uncertain tax positions. The specific timing of any cash payments, if any, relating to this obligation cannot be projected with reasonable certainty and, therefore, no amounts for this obligation are included in the table set forth above.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accounting estimates and judgments discussed in this section are those that we consider to be most critical to understand our combined financial statements (or the financial statements), because they involve significant judgments and uncertainties. More specifically, the accounting estimates and judgments outlined below are critical because they can materially affect our operating results and financial condition, inasmuch as they require management to make difficult and subjective judgments regarding uncertainties. Many of these estimates include determinations of fair value. All of these estimates reflect our best judgment about current and, for some estimates, future, economic and market conditions and effects based on information available to us as of the date of the accompanying financial statements. As a result, the accuracy of these estimates and the likelihood of future changes depend on a range of possible outcomes and a number of underlying variables, some of which are beyond our control. See also note 1 to the consolidated and combined financial statements included in Item 15 of this Annual Report for additional information on the significant accounting estimates and judgments underlying the financial results disclosed in our combined financial statements.
Revenue Recognition
We report our revenue in two categories: (i) product revenue, including hardware and software products; and (ii) service revenue, including revenue from professional services, training services and post-contract customer support (or PCS). Professional services primarily include installation, customization and consulting services. Revenue arrangements may include one of these single elements, or may incorporate one or more elements in a single transaction or combination of related transactions.
In September 2009, the FASB issued revenue recognition guidance applicable to multiple element arrangements, which:
•
applies to multiple element revenue arrangements that contain both software and hardware elements, focusing on determining which revenue arrangements are within the scope of the software revenue guidance; and
•
addresses how to separate consideration related to each element in a multiple element arrangement, excluding software arrangements, and establishes a hierarchy for determining the selling price of an element. It also eliminates the residual method of allocation by requiring that arrangement consideration be allocated at the inception of the arrangement to all elements using the relative selling price method.
We adopted this guidance on a prospective basis for revenue arrangements entered into, or materially modified, on or after February 1, 2011.
Multiple element arrangements entered into or materially modified on or after February 1, 2011 that include hardware which functions together with software to provide the essential functionality of the product are accounted

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under the FASB's new guidance applicable to multiple element arrangements. Multiple element arrangements entered into prior to February 1, 2011 and not materially modified on or after February 1, 2011 are accounted for in accordance with the FASB's guidance relating to revenue recognition for software arrangements as the software component of most of our multiple element arrangements is more than incidental to the products being sold.
For arrangements that do not require significant customization of the underlying software, we recognize revenue when we have persuasive evidence of an arrangement, the product has been shipped and the services have been provided to the customer, the sales price is fixed or determinable, collectability is probable, and all pertinent criteria are met as required by the FASB's guidance.
For multiple element arrangements entered into prior to February 1, 2011 and not materially modified on or after February 1, 2011, we allocate revenue to the delivered elements of the arrangement using the residual method, whereby revenue is allocated to the undelivered elements based on vendor specific objective evidence (or VSOE) of fair value of the undelivered elements with the remaining arrangement fee allocated to the delivered elements and recognized as revenue assuming all other revenue recognition criteria are met. If we are unable to establish VSOE of fair value for the undelivered elements of the arrangement, revenue recognition is deferred for the entire arrangement until all elements of the arrangement are delivered. However, if the only undelivered element is PCS, we recognize the arrangement fee ratably over the PCS period.
For multiple element arrangements entered into or materially modified after February 1, 2011 that include hardware which functions together with software to provide the essential functionality of the product, we allocate revenue to each element based on its selling price. The selling price used for each element is based on VSOE of fair value, if available, third party evidence (or TPE) of fair value if VSOE is not available, or our best estimate of selling price (or BESP) if neither VSOE nor TPE is available. In determining the units of accounting for these arrangements, we evaluate whether each element has stand-alone value as defined in the FASB's guidance. Given that the hardware and software function together to provide the essential functionality of the product and each element is critical to the overall tangible product sold, neither the software nor the hardware has stand-alone value. Professional services performed prior to the product's acceptance do not have stand-alone value and are therefore combined with the related hardware and software as one non-software deliverable. After determining the fair value for each deliverable, the arrangement consideration is allocated using the relative selling price method. Revenue is recognized accordingly for each deliverable once the respective revenue recognition criteria are met for that deliverable.
The majority of multiple element arrangements contain at least two of the following elements: (1) tangible product (hardware, software, and professional services performed prior to the product's acceptance), (2) post-contract support (PCS), (3) training, and (4) post acceptance services. Our tangible products are rarely sold separately. In addition, our tangible products are complex, and contain a high degree of customizations such that we are unable to demonstrate pricing within a pricing range to establish BESP as very few contracts are comparable. Therefore, we have concluded that cost plus a target gross profit margin provides the best estimate of the selling price.
PCS, training, and post acceptance services have various pricing practices based on several factors, including the geographical region of the customer, the size of the customer's installed base, the volume of services being sold and the type or class of service being performed. As noted above, we have VSOE of PCS for a portion of our arrangements. For PCS, we use our minimum substantive VSOE thresholds by region plus a reasonable margin as the basis to estimate BESP of PCS for transactions that do not meet the VSOE criteria. For training and post-acceptance services, we perform an annual study of stand-alone training and post-acceptance sales to arrive at BESP. While the study does not result in VSOE, it is useful in determining our BESP.
The timing of recognition for our revenue transactions involves numerous judgments, estimates and policy determinations. The most significant are summarized as follows:
PCS revenue is derived primarily from providing technical software support services, unspecified software updates and upgrades to customers on a when and if available basis. PCS revenue is recognized ratably over the term of the PCS period.
When PCS is included within a multiple element arrangement and the arrangement is within the scope of the software revenue guidance, we primarily utilize the substantive renewal rate to establish VSOE of fair value for the PCS.
When using the substantive renewal rate method, we may be unable to establish VSOE of fair value for PCS because the renewal rate is deemed to be non-substantive or there are no contractually-stated renewal rates. If the stated renewal rate is non-substantive, the entire arrangement fee is recognized ratably over the estimated economic life of the product (five to eight years) beginning upon delivery of all elements other than PCS. We believe that the estimated economic life of the product is the best estimate of how long the customer will renew PCS. If there is no contractually stated renewal rate, the entire arrangement fee is recognized ratably over the relevant contractual PCS term beginning upon delivery of all elements other than PCS.

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For arrangements that include a stated renewal rate, determining whether the actual renewal rate is substantive is a matter of judgment. For each group of our products, we stratify our customers based on the size of the installed base and the geographic location of the customer. Based on our historical negotiations and contract experience we believe that our customers behave differently and perceive different values for PCS based on these two main factors.
We evaluate many factors in determining the estimated economic life of our products, including the support period of the product, technological obsolescence, average time between new product releases and upgrade activity by customers. We have concluded that the estimated economic lives of our key software products range from five to eight years.
Our policy for establishing VSOE of fair value for professional services and training is based upon an analysis of separate sales of services, which are then compared with the fees charged when the same elements are included in a multiple element arrangement. Comverse has not yet established VSOE of fair value for any element other than PCS.
In certain multiple element arrangements, we are obligated to provide training services to customers related to the operation of our software products. These training services are either provided to the customer on a “defined” basis (limited to a specified number of days or training classes) or on an “as-requested” basis (unlimited training over a contractual period).
For multiple element arrangements containing as-requested training obligations that are within the scope of the software revenue guidance, we recognize the total arrangement consideration ratably over the contractual period during which we are required to “stand ready” to perform such training, provided that all other criteria for revenue recognition have been met.
For multiple element arrangements containing defined training obligations, the training services are typically provided to the customer prior to the completion of the installation services. For arrangements that are within the scope of the software revenue guidance, because revenue recognition does not commence until the completion of installation, the defined training obligations do not impact the timing of recognition of revenue. In certain circumstances in which training is provided after the end of the installation period, we commence revenue recognition upon the completion of training, provided that all other criteria for revenue recognition have been met.
Some of our arrangements require significant customization of the product to meet the particular requirements of the customer. For these arrangements, revenue is recognized, in accordance with the FASB's guidance for long-term construction type contracts using the percentage-of-completion (or POC) method.
The determination of whether services entail significant customization requires judgment and is primarily based on alterations to the features and functionality to the standard release, complex or unusual interfaces as well as the amount of hours necessary to complete the customization solution relative to the size of the contract. Revenue from these arrangements is recognized on the POC method based on the ratio of total hours incurred to date compared to estimated total hours to complete the contract. We are required to make judgments to estimate the total estimated costs and progress to completion. Changes to such estimates can impact the timing of the revenue recognition period to period. We use historical experience, project plans, and an assessment of the risks and uncertainties inherent in the arrangement to establish these estimates. Uncertainties in these arrangements include implementation delays or performance issues that may or may not be within our control. If some level of profitability is assured, but the related revenue and costs cannot be reasonably estimated, then revenue is recognized to the extent of costs incurred until such time that the project's profitability can be estimated or the services have been completed.
If VSOE of fair value of PCS does not exist, all revenue will be deferred until completion of the professional services and recognized ratably over the respective PCS period. If we determine that based on our estimates our costs exceed the sales price, the entire amount of the estimated loss is accrued in the period that such losses become known.
When revenue is recognized over multiple periods in accordance with our revenue recognition policies, the material cost, including hardware and third party software license fees are deferred and amortized over the same period that product revenue is recognized. These costs are recognized as “Deferred cost of revenue” on the combined balance sheets. However, we have made an accounting policy election whereby the cost for installation and other service costs are expensed as incurred, except for arrangements recognized in accordance with the FASB's guidance for long-term construction type contracts.
In the combined statements of operations, we classify revenue as product revenue or service revenue as prescribed by SEC Rules and Regulations. For multiple element arrangements that include both product and service elements, management evaluates various available indicators of fair value and applies its judgment to reasonably classify the arrangement fee between product revenue and service revenue. The amount of multiple element arrangement fees classified as product and service revenue based on management estimates of fair value when VSOE of fair value for all elements of an arrangement does not exist could differ from amounts classified as product and service revenue if VSOE of fair value of all elements existed. The allocation of multiple element arrangement fees between product revenue and

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service revenue, when VSOE of fair value of all elements does not exist, is for combined financial statement presentation purposes only and does not affect the timing or amount of revenue recognized.
In determining the amount of a multiple element arrangement fee that should be classified between product revenue and service revenue, we first allocate the arrangement fee to product revenue and PCS (PCS is classified as service revenue) based on management's estimate of fair value for those elements. The remainder of the arrangement fee, which is comprised of all other service elements, is allocated to service revenue. The estimate of fair value of the product element is based primarily on management's evaluation of direct costs and reasonable profit margins on those products. This was determined to be the most appropriate methodology as we have historically been product oriented with respect to pricing policies which facilitates the evaluation of product costs and related margins in arriving at a reasonable estimate of the product element fair value. Management's estimate of reasonable profit margins requires significant judgment and consideration of various factors, such as the impact of the economic environment on margins, the complexity of projects, the stability of product profit margins and the nature of products. The estimate of fair value for PCS is based on management's evaluation of weighted average PCS rates for arrangements for which VSOE of fair value of PCS exists.
Extended Payment Terms
One of the critical judgments that we make, related to revenue recognition, is the assessment that collectability is probable. Our recognition of revenue is based on our assessment of the probability of collecting the related accounts receivable balance at the onset of a sales arrangement. Certain of our arrangements include payment terms that depart from our customary practice. In these situations, if a customer does not have an adequate history of abiding by its contractual payment terms without concessions, the sales price is not considered fixed or determinable and revenue is recognized upon collection provided all other revenue recognition criteria have been met. We consider payment terms where more than 5% of the arrangement fees are due 120 days from customer acceptance to be extended. If the arrangement is with a new customer and the payment terms are extended, there is no evidence of collecting under the original payment terms without making concessions and therefore the presumption that the fee is not fixed and determinable cannot be overcome. If this arrangement is with an existing customer, an evaluation of the customer's payment history will take place to determine if the fee is fixed.
Percentage-of-Completion Accounting
We have a standard quarterly process in which management reviews the progress and performance of our significant contracts. As part of this process, management reviews include, but are not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities, and the related changes in estimates of revenues and costs. These risks and opportunities include management's judgment about the ability and costs to achieve the schedule requirements, technical requirements (for example, a newly-developed product versus a mature product) and other specific contract requirements. Management must make assumptions regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the contract (to estimate increases in wages and prices for materials and related support cost allocations), performance by our subcontractors, and the availability and timing of funding from our customer, among other variables. Based on this analysis, any adjustments to net sales, costs of sales and the related impact to operating income are recorded as necessary in the period they become known. These adjustments may result in an increase in operating profit during the performance of a contract to the extent we determine we will be successful in mitigating risks for schedule and technical requirements in addition to other specific contract risks or we will realize related opportunities. Likewise, these adjustments may decrease operating profit if we determine we will not be successful in mitigating these risks or we will not realize related opportunities. Changes in estimates of net sales, costs of sales, and the related impact to operating income are recognized using a cumulative catch-up, which recognizes in the current period the cumulative effect of the changes on current and prior periods. A significant change in one or more of these estimates could affect the profitability of one or more of our contracts.
 Stock-Based Compensation
We account for share-based payment awards, including employee stock options, restricted stock, restricted stock units and employee stock purchases, made to employees and directors in accordance with the FASB's guidance for share-based payment and related interpretative guidance, which requires the measurement and recognition of compensation expense for all such awards based on estimated fair value.
Comverse estimates the fair value of share-based payment awards on the date of grant using an option-pricing model. Under the FASB's guidance, stock-based compensation expense is measured at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the award's vesting period. Comverse uses the

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Black-Scholes option-pricing model to measure fair value of stock option awards. The Black-Scholes model requires judgments regarding the assumptions used within the model, the most significant of which are the stock price volatility assumption over the term of the awards and the expected life of the option award based on the actual and projected employee stock option behaviors. The inputs noted below that are factored into the option valuation model we use to measure the fair value of our stock awards are subjective estimates. Changes to these estimates could cause the fair value of our stock awards and related stock-based compensation expenses to vary materially. Except as noted below, the following key assumptions are used for all of Comverse stock-based compensation awards:
•
The risk-free interest rate assumption we use is based upon U.S. Treasury interest rates appropriate for the expected life of the awards.
•
Comverse's expected dividend rate is zero since Comverse does not currently pay cash dividends on their common stock and do not anticipate doing so in the foreseeable future.
•
Until Comverse establishes enough stock history the volatility will be calculated based on peer companies' volatility.
Comverse is also required to estimate expected forfeitures of stock-based awards at the grant date and recognize compensation cost only for those awards expected to vest. Although Comverse estimates forfeitures based on historical experience while a subsidiary of CTI and future expectation, actual forfeitures may differ. The forfeiture assumption is adjusted to the actual forfeitures that occur.
During the fiscal years ended January 31, 2014, 2013 and 2012, our stock-based compensation expense, including prior to the Share Distribution, was $10.2 million, $7.5 million and $3.7 million, respectively.
Recoverability of Goodwill
Goodwill represents the excess of the fair value of consideration transferred in the business combination over the fair value of tangible and intangible assets acquired net of the fair value of liabilities assumed and the fair value of any noncontrolling interest in the acquiree.
We apply the FASB's guidance when testing goodwill for impairment which permits management to make a qualitative assessment of whether goodwill is impaired, or opt to bypass the qualitative assessment, and proceed directly to performing the first step of the two-step impairment test. If management performs a qualitative assessment and concludes it is more-likely-than-not that the fair value of a reporting unit exceeds its carrying value, goodwill is not considered impaired and the two-step impairment test is unnecessary. However, if management concludes otherwise, it is then required to perform the first step of the two-step impairment test.
For reporting units where we decide to perform a qualitative assessment, our management assesses and makes judgments regarding a variety of factors which potentially impact the fair value of a reporting unit, including general economic conditions, industry and market-specific conditions, customer behavior, cost factors, our financial performance and trends, our strategies and business plans, capital requirements, management and personnel issues, and our stock price, among others. Management then considers the totality of these and other factors, placing more weight on the events and circumstances that are judged to most affect a reporting unit's fair value or the carrying amount of its net assets, to reach a qualitative conclusion regarding whether it is more-likely-than-not that the fair value of a reporting unit exceeds its carrying amount.
For reporting units where we perform the two-step goodwill impairment test, the first step requires us to compare the fair value of each reporting unit to the carrying value of its net assets. Management considers both an income-based approach using projected discounted cash flows and a market-based approach using multiples of comparable companies to determine the fair value of its reporting units. Management's estimate of fair value of each reporting unit is based on a number of subjective factors, including: (i) the appropriate weighting of valuation approaches (income-based approach and market-based approach), (ii) estimates of the future revenue and cash flows, (iii) discount rate for estimated cash flows, (iv) selection of peer group companies for the market-based approach, (v) required levels of working capital, (vi) assumed terminal value, (vii) the time horizon of cash flow forecasts, and (viii) control premium.
We use the work of an independent third party appraisal firm to assist us in considering our determination of the implied fair value of our goodwill. The fair values are calculated using the income approach and a market approach based on comparable companies. The income approach, more commonly known as the discounted cash flow approach, estimates fair value based on the cash flows that an asset can be expected to generate over its useful life. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then an impairment charge equal to the difference is recorded. Assumptions and estimates about future values of our reporting units and implied goodwill are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends,

65

and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the historical assumptions and estimates we have made are reasonable and appropriate, different assumptions and estimates could materially impact our reported financial results.
The determination of reporting units also requires management judgment. We assess whether a reporting unit exists within a reportable segment by identifying the unit, determining whether the unit qualifies as a business under U.S. GAAP, and assessing the availability and regular review by segment management of discrete financial information for the unit.
We recorded a goodwill impairment charge of approximately $5.6 million for the Comverse MI reporting unit for the fiscal year ended January 31, 2013. For more information, see note 1 and note 6 to the consolidated and combined financial statements included in Item 15 of this Annual Report.
Management's forecasts and estimates are based on assumptions that are consistent with the plans and estimates used to manage the business. Changes in these estimates could change the conclusion regarding an impairment of goodwill.
Income Taxes
Income taxes are provided using the asset and liability method, such that income taxes (i.e., deferred tax assets, deferred tax liabilities, taxes currently payable/refunds receivable and tax expense/benefit) are recorded based on amounts refundable or payable in the current year and include the results of any difference between U.S. GAAP and tax reporting. Deferred income taxes reflect the tax effect of net operating losses, capital losses and general business credit carryforwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates. Valuation allowances are established when management determines that it is more-likely-than-not that some portion or all of the deferred tax asset will not be realized. The financial effect of changes in tax laws or rates is accounted for in the period of enactment. The subsequent realization of net operating loss and general business credit carryforwards acquired in acquisitions accounted for using the acquisition method of accounting is recognized in the combined statement of operations.
We were included in the CTI consolidated federal and certain combined state income tax returns until completion of the Share Distribution. As such, we were not a separate taxable entity for U.S. federal and certain state income tax purposes until completion of the Share Distribution. In addition, we did not have a written tax sharing agreement with CTI. Our provisions for income taxes and related balance sheet accounts were presented as if we were a separate taxpayer (“separate return method”). This method of allocating the CTI consolidated current and deferred income taxes was systematic, rational and consistent with the asset and liability method. The separate return method represented a hypothetical computation assuming that our reported revenue and expenses were incurred by a separate taxable entity. Accordingly, the reported provision for income taxes and the related balance sheet account balances (including but not limited to the NOL deferred tax assets) did not equal the amounts that were allocable to us under the applicable consolidated federal and state tax laws. Further, as we did not have a tax-sharing agreement with CTI in place, the expected payable was treated as a dividend to the parent. Immediately following our separation from CTI, the consolidated CTI tax attributes were allocated between CTI and us based on the applicable tax laws.
From time to time, we have business transactions in which the tax consequences are uncertain. Significant judgment is required in assessing and estimating the tax consequences of these transactions. We prepare and file tax returns based on our interpretation of tax laws. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax, interest and penalty assessments. In determining our tax provision for financial reporting purposes, we establish a liability for uncertain tax positions unless such positions are determined to be more-likely-than-not of being sustained upon examination, based on their technical merits. That is, for financial reporting purposes, we only recognize tax benefits that we believe are more-likely-than-not of being sustained and then recognize the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. There is considerable judgment involved in determining whether positions taken on the tax return are more-likely-than-not of being sustained and determining the likelihood of various potential settlement outcomes.
We adjust our estimated liability for uncertain tax positions periodically because of new information discovered as a function of ongoing examinations by, and settlements with, the various taxing authorities, as well as changes in tax laws, regulations and interpretations. The combined tax provision of any given year includes adjustments to prior year income tax accruals that are considered appropriate as well as any related estimated interest. Our policy is to recognize all appropriately accrued interest and penalties on uncertain tax positions as part of income tax expense. For further information, see note 19 to the consolidated and combined financial statements included in Item 15 of this Annual Report.

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As part of our accounting for business combinations, some of the purchase price is allocated to goodwill and intangible assets. Impairment expenses associated with goodwill are generally not tax deductible and will result in an increased effective income tax rate in the fiscal period any impairment is recorded. Amortization expenses associated with acquired intangible assets are generally not tax deductible pursuant to our existing tax structure; however, deferred taxes have been recorded for non-deductible amortization expenses as a part of the purchase price allocation process. We have taken into account the allocation of these identified intangibles among different taxing jurisdictions, including those with nominal or zero percent tax rates, in establishing the related deferred tax liabilities. Under the FASB's guidance, the income tax benefit from future releases of the acquisition date valuation allowances or income tax contingencies, if any, are reflected in the income tax provision in the combined statements of operations, rather than as an adjustment to the purchase price allocation.
Litigation and Contingencies
Contingencies by their nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss, if any. We accrue for costs relating to litigation, claims and other contingent matters when such liabilities become probable and reasonably estimable. We expense legal fees associated with consultations with outside counsel and defense of lawsuits as incurred. Such estimates may be based on advice from third parties or solely on management's judgment, as appropriate. Actual amounts paid may differ materially from amounts estimated, and such differences will be charged to operations in the period in which the final determination of the liability is made.
From time to time, we receive notices that our products or processes may be infringing the patent or intellectual property rights of others; and notices of other lawsuits or other claims against us. We assess each matter in order to determine if a contingent liability should be recorded. In making this determination, management may, depending on the nature of the matter, consult with internal and external legal counsel. Based on the information obtained combined with management's judgment regarding all the facts and circumstances of each matter, we determine whether a contingent loss is probable and whether the amount of such loss can be estimated. Should a loss be probable and estimable, we record a contingent loss. Should the judgments and estimates made by management not coincide with future events, such as a judicial action against us where we expected no merit on the part of the party bringing the action against us, we may need to record additional contingent losses that could materially adversely impact our results of operations. Alternatively, if the judgments and estimates made by management are incorrect and a particular contingent loss does not occur, the contingent loss recorded would be reversed thereby favorably impacting our results of operations.
Israel Employees Severance Pay
Under Israeli law, we are obligated to make severance payments under certain circumstances to employees of our Israeli subsidiaries on the basis of each individual’s current salary and length of employment. Our liability for severance pay is calculated pursuant to Israel’s Severance Pay Law based on the most recent monthly salary of the employee multiplied by the number of years of employment, as of the balance sheet date. The liability for severance pay is recognized as compensation benefits in the consolidated and combined statements of operations. Employees are entitled to one month’s salary for each year of employment or a portion thereof.  We record the obligation as if it was payable at each balance sheet date (“shut-down method”).  A portion of such severance liability is funded by monthly deposits into insurance policies, which are restricted to only be used to satisfy such severance payments. Any change in the fair value of the asset is recognized as an adjustment to compensation expense in the consolidated and combined statements of operations. The asset and liability are recognized gross and not offset on the consolidated balance sheet. Upon involuntary termination, employees will receive the balance from deposited funds from the insurance policies with the remaining balance paid by us. For voluntarily termination the employees are entitled, based on Company's policy, to the balance in the deposited funds. Any remaining net liability balance is reversed as compensation benefits in the consolidated and combined statements of operations.
 For employees in Israel hired after January 2011, we make regular deposits with certain insurance companies for accounts controlled by each applicable employee in order to secure the employee's rights upon termination. We are relieved from any severance pay liability with respect to deposits made on behalf of each employee. As such, the severance plan is only defined by the monthly contributions made by us, the liability accrued in respect of these employees and the amounts funded are not reflected in the consolidated and combined balance sheets. The portion of liability not funded is included in Other liabilities in the consolidated balance sheets.
Probability assessment of performance based stock units vesting
We grant share-based payment awards as compensation to certain employees. A substantial portion of these awards vest only if we achieve pre-established performance targets. The amount and timing of compensation expense

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recognized for such performance-based awards is dependent upon management's quarterly assessment of the likelihood and timing of achieving these future profitability targets. Accordingly, if the projections used by management in its assessment prove, with the benefit of hindsight, to be inaccurate, the amount of life-to-date and future compensation expense related to share-based payments could significantly increase or decrease. The share-based awards have a total potential compensation expense impact of up to $3.4 million within a two year vesting period.
Expense Allocations
Prior to the spin-off, CTI provided a variety of services to us. CTI directly assigned, where possible, certain general and administrative costs to us based on actual use of those services. Where direct assignment of costs is not possible, or practical, CTI used other indirect methods, to estimate the allocation of costs. Allocated costs include general support services such as information technology, legal services, human resource services, general accounting and finance, and executive support. Substantially all of these allocations are reflected in “Selling, general, and administrative” expenses in our combined statements of operations.
Employee compensation and overhead expenses were allocated utilizing a time study of CTI employees' percentage of time spent on matters related to us. External vendor expenses were allocated based on information provided by the vendor or an internal analysis of benefits derived by us from the services incurred by CTI.
We considered these expense allocations to be a reasonable reflection of the utilization of services provided. The allocations may not, however, reflect the expense we would have incurred as an independent company. Actual costs which may have been incurred if we had been a stand-alone company for the fiscal years ended January 31, 2013 and 2012 would depend on a number of factors, including how we chose to organize ourself, and what, if any, functions were outsourced or performed by our employees.
Accounting Standards Applicable to Emerging Growth Companies
We are an emerging growth company as defined under the JOBS Act. Emerging growth companies can delay adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies. We intend to take advantage of such extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates. If we were to elect to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.
RECENT ACCOUNTING PRONOUNCEMENTS
See note 2, Recent Accounting Pronouncements, to the consolidated and combined financial statements included in Item 15 of this Annual Report.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates and foreign currency exchange rates, which may adversely affect our combined financial position and results of operations. We seek to minimize these risks through regular operating and financing activities, and when deemed appropriate, through the use of derivative financial instruments, including foreign currency forward contracts. It is our policy to enter into derivative transactions only to the extent considered necessary to meet our risk management objectives. We do not purchase, hold or sell derivative financial instruments for trading or speculative purposes.
Investments
Cash, Cash Equivalents, Restricted Cash and Bank Time Deposits
We invest in cash, cash equivalents. Cash primarily consists of cash on hand and bank deposits. Cash equivalents primarily consist of interest-bearing money market accounts, commercial paper, agency notes and other highly liquid investments with an original maturity of three months or less when purchased. Restricted cash and bank time deposits include compensating cash balances related to existing lines of credit and deposits that are pledged as collateral or restricted for use to settle potential indemnification claims arising from the disposition of businesses, to settle specified performance guarantees to customers and vendors, letters of credit, foreign currency transactions in the ordinary course of business and pending tax judgments. Restricted bank time deposits generally consist of certificates of deposit with original maturities of twelve months or less. Interest rate changes could result in an increase or decrease in interest income we generate from these interest-bearing assets. Our cash, cash equivalents, restricted cash and bank time deposits are primarily maintained at high credit-quality financial institutions around the world. We maintain cash and cash equivalents in U.S. dollars and in foreign currencies, which

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are subject to risks related to foreign currency exchange rate fluctuations. The primary objective of our investment activities is the preservation of principal while maximizing investment income in accordance with our prescribed risk management profile. We have investment guidelines relative to diversification and maturities designed to maintain safety and liquidity.
As of January 31, 2014 and 2013, we had cash and cash equivalents totaling approximately $254.6 million and $262.9 million, respectively, and restricted cash and bank time deposits of $34.3 million and $28.5 million, respectively. In addition, we had $33.8 million and $14.0 million of restricted cash classified as a long-term asset as of January 31, 2014 and 2013, respectively.
Interest Rate Risk on Our Investments
To provide a meaningful assessment of the interest rate risk associated with our investment portfolio, we performed a sensitivity analysis to determine the impact a change in interest rates would have on the value of the investment portfolio assuming an average short-term interest rate increase or decrease of 0.5%, or 50 basis points, relative to average rates realized during the fiscal year ended January 31, 2014. Such a change would cause our interest income from cash and cash equivalents and short-term investments for the fiscal year ended January 31, 2015 to increase by approximately $1.5 million, or decrease by approximately $0.5 million.
Foreign Currency Exchange Rate Risk
Although we engage in hedging activities, we are subject to risk related to foreign currency exchange rate fluctuations. The functional currency for most of our significant foreign subsidiaries is the respective local currency, of which the notable exceptions are our subsidiaries in Israel, whose functional currencies are the U.S. dollar. We are exposed to foreign currency exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries into U.S. dollars for reporting purposes. If there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars results in a gain or loss which is recorded as a component of accumulated other comprehensive income within equity.
Our international operations subject us to risks associated with currency fluctuations. Most of our revenue is denominated in U.S. dollars, while a significant portion of our operating expenses, primarily labor expenses, are denominated in the local currencies where our foreign operations are located, primarily Israel. As a result, our combined U.S. dollar operating results are subject to the potentially adverse impact of fluctuations in foreign currency exchange rates between the U.S. dollar and the other currencies in which we conduct business.
In addition, we have certain assets and liabilities that are denominated in currencies other than the respective entity’s functional currency. Changes in the functional currency value of these assets and liabilities create fluctuations that result in gains or losses. We recorded foreign currency transaction gains and losses, realized and unrealized, in other income (expense), net in the combined statements of operations. We recorded net foreign currency transaction losses of approximately $10.3 million in the fiscal year ended January 31, 2014.
As of January 31, 2014, we had $25.6 million notional amount of foreign currency forward contracts.
A sensitivity analysis was performed on all of our foreign exchange derivatives as of January 31, 2014. A 10% increase in the value of the U.S. dollar would lead to a decrease in the fair value of our hedging instruments by approximately $3.0 million. Conversely, a 10% decrease in the value of the U.S. dollar would result in an increase in the fair value of these financial instruments by approximately $2.2 million.
The counterparties to these foreign currency forward contracts are highly rated commercial banks. While we believe the risk of counterparty nonperformance, including our own, is not material, the recent volatility in the global financial markets has impacted some of the financial institutions with which we do business. A sustained decline in the financial stability of financial institutions as a result of volatility in the financial markets could affect our ability to secure creditworthy counterparties for our foreign currency hedging programs.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 is included in Item 15 of this Annual Report.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of January 31, 2014. Disclosure controls and procedures are those controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports it files under the Exchange Act is recorded, processed, summarized and reported within required time periods specified by the rules and forms promulgated by the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or furnish under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As a result of this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of January 31, 2014.
Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control - Integrated Framework (1992)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on the above evaluation, management has concluded that our internal control over financial reporting was effective as of January 31, 2014.
As previously disclosed, we had a material weakness in internal control over financial reporting as of January 31, 2013, in the area of income taxes as described below along with the actions taken to remediate this material weakness as of January 31, 2014. We have concluded that the material weakness is remediated as of January 31, 2014.
Income taxes. As of January 31, 2013, we did not have adequate personnel with sufficient technical expertise in place for the entire reporting period to properly account for and disclose income taxes in accordance with U.S. GAAP and had ineffective policies and procedures for our income tax provision, resulting in increases or decreases in provisions for income taxes, related tax liabilities and deferred income tax assets and liabilities from our initial assessments and our inability to timely file our Form 10-K for the fiscal year ended January 31, 2013 by its prescribed due date.
Remedial actions. Throughout fiscal 2013 we continued our efforts to simplify and improve our procedures and controls over our complex income tax processes and tax structure and hired and trained appropriate personnel who have a focus on accounting for income taxes on a U.S. GAAP basis enabling us to calculate our tax provisions accurately and timely.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm on the effectiveness of our internal control over financial reporting due to a transition period established by the rules of the SEC for emerging growth companies.
Changes in Internal Control Over Financial Reporting
Other than the remediation efforts described above, there have been no changes in our internal control over financial reporting that occurred since our last filing that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
Not applicable.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Code of Conduct
The Board has adopted I ACT @ Comverse (our Values Statement and Code of Conduct) to promote commitment to honesty, ethical behavior and lawful conduct. I ACT @ Comverse applies to our principal executive officer, principal financial officer, principal accounting officer, controller, and any persons performing similar functions, as well as all of our directors, officers and employees. I ACT @ Comverse provides the foundation for compliance with all corporate policies and procedures and best business practices.

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I ACT @ Comverse can be found on our website, www.comverse-investors.com. A copy of I ACT @ Comverse is available in print free of charge to any stockholder who requests a copy by sending an email to compliance@comverse.com or by writing to:
Comverse, Inc.
200 Quannapowitt Parkway
Wakefield, MA 01880
Attention: Legal Department-Corporate Secretary
We intend to disclose on our website (www.comverse-investors.com) any amendment to, or waiver from, a provision of I ACT @ Comverse as required by applicable law or NASDAQ rules.
The other information called for by Item 10 will be set forth under the headings “Proposal 1 - Election of Directors,” “Corporate Governance and Board Matters,” “Executive Officers of the Registrant” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive proxy statement for our 2014 annual meeting of stockholders (or the 2014 Proxy Statement), and is incorporated herein by reference.

ITEM 11.
EXECUTIVE COMPENSATION
Information called for by Item 11 is set forth under the headings “Compensation of Directors,” “Executive Compensation” and “Corporate Governance and Board Matters” in the 2014 Proxy Statement, and is incorporated herein by reference.

ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table sets forth certain information about securities authorized for issuance under our equity compensation plan as of January 31, 2014:
 
Plan Category
 
Number of securities
to be issued upon
exercise of outstanding options, warrants and rights
 
 
 
Weighted average
exercise price of outstanding
options, warrants and rights
 
 
 
Number
of securities
remaining available
for future issuance
under  equity
compensation plans
(excluding securities
reflected in column (a))
 
 
 
(a)
 
 
 
(b)
 
 
 
(c)
 
Equity compensation plans approved by security holders
 
1,410,490

 
(1) 
 
$
29.45

 
(2) 
 
1,811,375

(3) 
Equity compensation plans not approved by security holders
 
—

 
 
 
—

 
 
 
—

  
Total
 
1,410,490

 
(1) 
 
$
29.45

 
(2) 
 
1,811,375

(3) 
(1)
Consists of outstanding (i) options to purchase 754,349 shares of common stock and (ii) RSU awards covering an aggregate of 656,141 shares of common stock, of which 81,395 shares were performance-based awards. RSU awards have service requirements only or performance and service requirements. Shares in settlement of vested RSU awards are deliverable on the vesting date.
(2)
Reflects the weighted average exercise price of options only. As RSU awards have no exercise price, they are excluded from the weighted average exercise price calculation set forth in column (b).
(3)
Under the plan, a total of 2.5 million shares were reserved for issuance for awards issued after October 31, 2012, the completion date of the Share Distribution. As of January 31, 2014, RSU and option awards covering an aggregate of 688,625 shares of common stock were granted after October 31, 2012. In addition, a total of 5.0 million shares were reserved for issuance under awards issued as part of the Share Distribution in replacement of CTI awards outstanding prior to the completion of the Share Distribution. Such reserved shares could only be issued pursuant to replacement awards and may not be issued pursuant to any awards issued after the completion of the Share Distribution. RSU and option replacement awards covering an aggregate of 1,293,310 shares of common stock were issued in connection with the Share Distribution.
The other information called for by Item 12 is set forth under the heading “Beneficial Ownership of our Common Stock” in the 2014 Proxy Statement, and is incorporated herein by reference.

71


ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information called for by Item 13 is set forth under the heading “Transactions with Related Persons” and “Corporate Governance and Board Matters” in the 2014 Proxy Statement, and is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Information called for by Item 14 is set forth under the heading “Proposal 2 - Ratification of the Appointment of Independent Registered Public Accounting Firm” in the 2014 Proxy Statement, and is incorporated herein by reference.


72

PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(b) Exhibits
Exhibit No.
Exhibit Description
3.1*
Amended and Restated Certificate of Incorporation of Comverse, Inc. (incorporated herein by reference to Exhibit 3.2 of the Registrant's Current Report on Form 8-K filed with the SEC on October 26, 2012).
3.2*
Bylaws of Comverse, Inc. (incorporated herein by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed with the SEC on November 1, 2012).
4.1*
Specimen Certificate for Common Stock of Comverse, Inc. (incorporated herein by reference to Exhibit 4.1 of the Registrant's Amendment No. 4 to Registration Statement on Form 10 filed with the SEC on September 19, 2012).
10.1*
Distribution Agreement, dated as of October 31, 2012, by and between Comverse Technology, Inc. and Comverse, Inc. (incorporated herein by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the SEC on November 1, 2012).
10.2*
Transition Services Agreement, dated as of October 31, 2012, by and between Comverse Technology, Inc. and Comverse, Inc. (incorporated herein by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K filed with the SEC on November 1, 2012).
10.3*
Tax Disaffiliation Agreement, dated as of October 31, 2012, by and between Comverse Technology, Inc. and Comverse, Inc. (incorporated herein by reference to Exhibit 10.3 of the Registrant's Current Report on Form 8-K filed with the SEC on November 1, 2012).
10.4*
Employee Matters Agreement, dated as of October 31, 2012, by and between Comverse Technology, Inc. and Comverse, Inc. (incorporated herein by reference to Exhibit 10.4 of the Registrant's Current Report on Form 8-K filed with the SEC on November 1, 2012).
10.5*†
Form of Deferred Stock Unit Award (incorporated herein by reference to Exhibit 10.6 of the Registrant's Current Report on Form 8-K filed with the SEC on November 1, 2012).
10.6*†
Form of Employee Restricted Stock Unit Award (incorporated hereby by reference to Exhibit 10.6 of the Registrant’s Annual Report on Form 10-K filed with the SEC on May 16, 2013).
10.7*†
Form of Executive Restricted Stock Unit Award (incorporated hereby by reference to Exhibit 10.7 of the Registrant’s Annual Report on Form 10-K filed with the SEC on May 16, 2013).
10.8*†
Form of Employee Non Qualified Stock Option Award (incorporated hereby by reference to Exhibit 10.8 of the Registrant’s Annual Report on Form 10-K filed with the SEC on May 16, 2013).
10.9*
Form of Executive Non Qualified Stock Option Award (incorporated hereby by reference to Exhibit 10.9 of the Registrant’s Annual Report on Form 10-K filed with the SEC on May 16, 2013).
10.10*†
Form of Comverse, Inc. 2012 Stock Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.26 of the Registrant's Amendment No. 2 to Registration Statement on Form 10 filed with the SEC on August 15, 2012).
10.11*†
Form of Comverse, Inc. 2012 Annual Performance Bonus Plan (incorporated herein by reference to Exhibit 10.27 of the Registrant's Amendment No. 2 to Registration Statement on Form 10 filed with the SEC on August 15, 2012).
10.12*
Form of Officer Indemnification Agreement (incorporated by reference to Exhibit 10.10 of the Registrant's Quarterly Report on Form 10-Q filed with the SEC on December 14, 2012).
10.13*
Form of Director Indemnification Agreement (incorporated herein by reference to Exhibit 10.33 of the Registrant's Amendment No. 2 to Registration Statement on Form 10 filed with the SEC on August 15, 2012).
10.14*†
Employment Agreement, dated as of April 26, 2012, by and among Comverse, Inc., Comverse Technology, Inc. and Philippe Tartavull (incorporated herein by reference to Exhibit 10.23 of the Registrant's Amendment No. 1 to Registration Statement on Form 10 filed with the SEC on July 18, 2012).
10.15*†
Employment Agreement, dated as of July 1, 2012, by and among Comverse, Inc., Comverse Technology, Inc. and Thomas B. Sabol (incorporated herein by reference to Exhibit 10.29 of the Registrant's Amendment No. 2 to Registration Statement on Form 10 filed with the SEC on August 15, 2012).
10.16*†
Offer Letter, dated as of October 3, 2012, by and between Comverse, Inc. and Gani Nayak (incorporated hereby by reference to Exhibit 10.15 of the Registrant’s Annual Report on Form 10-K filed with the SEC on May 16, 2013).

73

10.17*†
Form of Employee Replacement Non Qualified Stock Option Award (incorporated hereby by reference to Exhibit 10.22 of the Registrant’s Annual Report on Form 10-K filed with the SEC on May 16, 2013).
10.18**†
Form of Director Stock Unit Award.
10.19*
Agreement dated as of March 12, 2014 by and among Comverse, Inc. and Steven R. Becker, Matthew A. Drapkin, Becker Drapkin Management, L.P., Becker Drapkin Partners (QP), L.P., Becker Drapkin Partners, L.P., BD Partners VII, L.P., BD Partners VII SPV, L.P., and BC Advisors, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on March 12, 2014).
21.1**
Subsidiaries of Registrant.
23.1**
Consent of Independent Registered Public Accounting Firm.
31.1**
Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
31.2**
Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
32.1***
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2***
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.1
The following materials from the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 2014, formatted in XBRL (eXtensible Business Reporting Language), include: (i) the Consolidated Balance Sheets, (ii) the Consolidated and Combined Statements of Operations, (iii) the Consolidated and Combined Statement of Comprehensive Income (iv) the Consolidated and Combined Statements of Equity, (v) the Consolidated and Combined Statements of Cash Flows, (vi) the Notes to the Consolidated Financial Statements.****
*
Incorporated by reference.
**
Filed herewith.
***
This exhibit is being “furnished” pursuant to Item 601(b)(32) of SEC Regulation S-K and is not deemed “filed” with the Securities and Exchange Commission and is not incorporated by reference in any filing of the Registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934.
****
In accordance with Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101.1 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
†
Constitutes a management contract or compensatory plan or arrangement.


74

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
COMVERSE, INC.
 
 
 
April 16, 2014
By:
/s/ Philippe Tartavull
 
 
Philippe Tartavull
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
April 16, 2014
By:
/s/ Thomas B. Sabol
 
 
Thomas B. Sabol
 
 
Senior Vice President and Chief Financial Officer
 
 
(Principal Financial Officer)
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Philippe Tartavull
April 16, 2014
Philippe Tartavull, President, Chief Executive Officer and Director
(Principal Executive Officer)
 
 
 
/s/ Thomas B. Sabol
April 16, 2014
Thomas B. Sabol, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
 
 
 
/s/ Shawn Rathje
April 16, 2014
Shawn Rathje, Chief Accounting Officer and Corporate Controller
(Principal Accounting Officer)
 
 
 
/s/ Henry R. Nothhaft
April 16, 2014
Henry R. Nothhaft, Chairman
 
 
 
/s/ Susan D. Bowick
April 16, 2014
Susan D. Bowick, Director
 
 
 
/s/ James Budge
April 16, 2014
James Budge, Director
 
 
 
/s/ Matthew A. Drapkin
April 16, 2014
Matthew A. Drapkin, Director
 
 
 
/s/ Doron Inbar
April 16, 2014
Doron Inbar, Director
 
 
 
/s/ Mark C. Terrell
April 16, 2014
Mark C. Terrell, Director
 
 
 
/s/ Neil Montefiore
April 16, 2014
Neil Montefiore, Director
 


75

COMVERSE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS


F-1



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors of Comverse, Inc.
Wakefield, Massachusetts

We have audited the accompanying consolidated balance sheets of Comverse, Inc. and subsidiaries (the "Company") as of January 31, 2014 and 2013, and the related consolidated and combined statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended January 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated and combined financial statements present fairly, in all material respects, the financial position of Comverse, Inc. and subsidiaries as of January 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated and combined financial statements, prior to the spin-off from Comverse Technology, Inc. on October 31, 2012, the Company was comprised of Comverse, Inc. and subsidiaries, Starhome B.V. and subsidiaries and Exalink Ltd. The combined financial statements prior to October 31, 2012 also include allocations from Comverse Technology, Inc. These allocations may not be reflective of the actual level of costs which would have been incurred had the Company operated as a separate entity apart from Comverse Technology, Inc.




/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts
April 16, 2014


F-2

COMVERSE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

 
January 31,
 
2014
 
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
254,580

 
$
262,921

Restricted cash and bank time deposits
34,343

 
28,484

Accounts receivable, net of allowance of $6,945 and $8,841, respectively
89,361

 
123,612

Inventories
16,166

 
24,800

Deferred cost of revenue
14,500

 
34,031

Deferred income taxes
2,329

 
17,938

Prepaid expenses
17,000

 
25,196

Other current assets
1,680

 
9,923

Total current assets
429,959

 
526,905

Property and equipment, net
41,541

 
37,442

Goodwill
150,346

 
149,987

Intangible assets, net
5,153

 
7,909

Deferred cost of revenue
45,717

 
72,121

Deferred income taxes
1,720

 
9,421

Long-term restricted cash
33,815

 
14,030

Other assets
40,586

 
39,975

Total assets
$
748,837

 
$
857,790

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
168,406

 
$
185,611

Deferred revenue
239,902

 
320,347

Deferred income taxes
514

 
7,689

Income taxes payable
2,102

 
8,538

Total current liabilities
410,924

 
522,185

Deferred revenue
113,426

 
143,725

Deferred income taxes
43,735

 
41,767

Other long-term liabilities
147,942

 
168,876

Total liabilities
716,027

 
876,553

Commitments and contingencies

 

Equity:
 
 
 
Common stock, $0.01 par value - authorized, 100,000,000 shares; issued, 22,286,123 and 21,934,569 shares, respectively; outstanding, 22,251,226 and 21,933,427 shares, respectively
223

 
219

Treasury stock, at cost, 34,897 and 1,142 shares, respectively
(1,024
)
 
(33
)
Accumulated deficit
(24,251
)
 
(42,937
)
Additional paid-in-capital
34,530

 
2,237

Accumulated other comprehensive income
23,332

 
21,751

Total equity
32,810

 
(18,763
)
Total liabilities and equity
$
748,837

 
$
857,790

The accompanying notes are an integral part of these consolidated and combined financial statements.

F-3

COMVERSE, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
 
Fiscal Years Ended January 31,
 
2014
 
2013
 
2012
Revenue:
 
 
 
 
 
Product revenue
$
220,167

 
$
242,104

 
$
276,459

Service revenue
432,334

 
435,659

 
494,698

Total revenue
652,501

 
677,763

 
771,157

Costs and expenses:
 
 
 
 
 
Product costs
116,259

 
123,152

 
136,024

Service costs
286,217

 
308,492

 
332,843

Research and development, net
67,512

 
76,461

 
94,238

Selling, general and administrative
134,031

 
160,340

 
175,882

Other operating expenses:
 
 
 
 
 
Impairment of goodwill
—

 
5,605

 
—

Restructuring expenses
10,783

 
5,905

 
20,728

Total other operating expenses
10,783

 
11,510

 
20,728

Total costs and expenses
614,802

 
679,955

 
759,715

Income (loss) from operations
37,699

 
(2,192
)
 
11,442

Interest income
614

 
829

 
1,755

Interest expense
(847
)
 
(901
)
 
(953
)
Interest expense on notes payable to CTI
—

 
(455
)
 
(409
)
Other expense, net
(9,591
)
 
(4,049
)
 
(7,192
)
Income (loss) before income tax expense
27,875

 
(6,768
)
 
4,643

Income tax expense
(9,189
)
 
(13,526
)
 
(25,291
)
Net income (loss) from continuing operations
18,686

 
(20,294
)
 
(20,648
)
Income from discontinued operations, net of tax
—

 
26,542

 
7,761

Net income (loss)
18,686

 
6,248

 
(12,887
)
Less: Net income attributable to noncontrolling interest
—

 
(1,167
)
 
(2,574
)
Net income (loss) attributable to Comverse, Inc.
$
18,686

 
$
5,081

 
$
(15,461
)
Weighted average common shares outstanding:
 
 
 
 
 
Basic
22,164,131

 
21,923,981

 
21,923,241

Diluted
22,382,234

 
21,923,981

 
21,923,241

Net income (loss) attributable to Comverse, Inc.
 
 
 
 
 
Net income (loss) from continuing operations
$
18,686

 
$
(20,294
)
 
$
(20,648
)
Income from discontinued operations, net of tax
—

 
25,375

 
5,187

Net income (loss) attributable to Comverse, Inc.
$
18,686

 
$
5,081

 
$
(15,461
)
Earnings (loss) per share attributable to Comverse, Inc.’s stockholders:
 
 
 
 
Basic earnings (loss) per share
 
 
 
 
 
Continuing operations
$
0.84

 
$
(0.93
)
 
$
(0.94
)
Discontinued operations
—

 
1.16

 
0.23

Basic earnings (loss) per share
$
0.84

 
$
0.23

 
$
(0.71
)
Diluted earnings (loss) per share
 
 
 
 
 
Continuing operations
$
0.83

 
$
(0.93
)
 
$
(0.94
)
Discontinued operations
—

 
1.16

 
0.23

Diluted earnings (loss) per share
$
0.83

 
$
0.23

 
$
(0.71
)
The accompanying notes are an integral part of these consolidated and combined financial statements.

F-4

COMVERSE, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)

 
Fiscal Years Ended January 31,
 
2014
 
2013
 
2012
 
 
 
 
 
 
Net income (loss)
$
18,686

 
$
6,248

 
$
(12,887
)
Other comprehensive income ("OCI"), net of tax:

 

 
 
     Foreign currency translation adjustments
1,998

 
511

 
4,523

     Changes in accumulated OCI on cash flow hedges
(417
)
 
111

 
(630
)
Other comprehensive income, net of tax
1,581

 
622

 
3,893

Comprehensive income (loss)
20,267

 
6,870

 
(8,994
)
Less: comprehensive income attributable to noncontrolling interest
—

 
(1,167
)
 
(2,563
)
Comprehensive income (loss) attributable to Comverse, Inc.
$
20,267

 
$
5,703

 
$
(11,557
)
The accompanying notes are an integral part of these consolidated and combined financial statements.


F-5

COMVERSE, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF EQUITY
(In thousands, except share data)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number
of
Shares
 
Par
Value
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Net Investment of CTI
 
Accumulated Other Comprehensive Income
 
Comverse,
 Inc.’s
Shareholders’
Equity
 
Non controlling Interest
 
Total Equity
Balance, February 1, 2011
 
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(84,602
)
 
$
17,095

 
$
(67,507
)
 
$
4,216

 
$
(63,291
)
Net loss
 
—

 
—

 
—

 
—

 
—

 
(15,461
)
 
—

 
(15,461
)
 
2,574

 
(12,887
)
Other comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
—

 
—

 
3,904

 
3,904

 
(11
)
 
3,893

Decrease in net investment in CTI
 
—

 
—

 
—

 
—

 
—

 
(8,091
)
 
—

 
(8,091
)
 
208

 
(7,883
)
Stock-based compensation expense
 
—

 
—

 
—

 
—

 
—

 
4,081

 
—

 
4,081

 
—

 
4,081

Balance, January 31, 2012
 
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(104,073
)
 
$
20,999

 
$
(83,074
)
 
$
6,987

 
$
(76,087
)
Net income (loss)
 
—

 
—

 
—

 
—

 
10,777

 
(5,696
)
 
—

 
5,081

 
1,167

 
6,248

Other comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
—

 
—

 
622

 
622

 
—

 
622

Exercise of stock options
 
8,534

 
—

 
—

 
233

 
—

 
—

 
—

 
233

 
—

 
233

Common stock issued for restricted stock unit awards
 
2,794

 
—

 
(33
)
 
—

 
—

 
—

 
—

 
(33
)
 
—

 
(33
)
Stock-based compensation expense
 
—

 
—

 
—

 
2,004

 
—

 
6,036

 
—

 
8,040

 
—

 
8,040

Impact from other equity transactions
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
185

 
185

CTI contribution
 
—

 
—

 
—

 
—

 
—

 
47,740

 
—

 
47,740

 
—

 
47,740

Reclassification of net investment in CTI to Common Stock and Accumulated Deficit in connection with Share Distribution
 
21,923,241

 
219

 
—

 
—

 
(53,714
)
 
53,495

 
—

 
—

 
—

 
—

Starhome Disposition
 
—

 
—

 
—

 
—

 
—

 
2,498

 
130

 
2,628

 
(8,339
)
 
(5,711
)
Balance, January 31, 2013
 
21,934,569

 
$
219

 
$
(33
)
 
$
2,237

 
$
(42,937
)
 
$
—

 
$
21,751

 
$
(18,763
)
 
$
—

 
$
(18,763
)
Net income
 
—

 
—

 
—

 
—

 
18,686

 
—

 
—

 
18,686

 
—

 
18,686

Other comprehensive income, net of tax
 
—

 
—

 
—

 
—

 
—

 
—

 
1,581

 
1,581

 
—

 
1,581

Exercise of stock options
 
41,250

 
1

 
—

 
1,108

 
—

 
—

 
—

 
1,109

 
—

 
1,109

Common stock issued for restricted stock unit awards
 
310,304

 
3

 
(991
)
 
(3
)
 
—

 
—

 
—

 
(991
)
 
—

 
(991
)
Stock-based compensation expense
 
—

 
—

 
—

 
10,208

 
—

 
—

 
—

 
10,208

 
—

 
10,208

CTI contribution
 
—

 
—

 
—

 
20,980

 
—

 
—

 
—

 
20,980

 
—

 
20,980

Balance, January 31, 2014
 
22,286,123

 
$
223

 
$
(1,024
)
 
$
34,530

 
$
(24,251
)
 
$
—

 
$
23,332

 
$
32,810

 
$
—

 
$
32,810

The accompanying notes are an integral part of these consolidated and combined financial statements.



F-6

COMVERSE, INC. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
 
Fiscal Years Ended January 31,
 
2014
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income (loss)
$
18,686

 
$
6,248

 
$
(12,887
)
Net income from discontinued operations
—

 
(26,542
)
 
(7,761
)
Non-cash items
 
 
 
 
 
Depreciation and amortization
19,032

 
31,865

 
34,165

Impairment of goodwill
—

 
5,605

 
—

Provision for doubtful accounts
1,293

 
518

 
4,811

Stock-based compensation expense
10,208

 
7,517

 
3,660

Deferred income taxes
17,345

 
(11,724
)
 
2,807

Inventory write-downs
4,239

 
6,097

 
4,456

Other non-cash items, net
(765
)
 
1,244

 
(91
)
Changes in assets and liabilities:
 
 
 
 
 
Accounts receivable
32,498

 
9,538

 
22,150

Inventories
374

 
(7,085
)
 
(2,788
)
Deferred cost of revenue
45,882

 
36,124

 
37,760

Prepaid expense and other current assets
12,845

 
14,881

 
4,852

Accounts payable and accrued expenses
(12,926
)
 
(19,806
)
 
(35,989
)
Income tax payable
(7,237
)
 
37,828

 
(2,582
)
Deferred revenue
(110,828
)
 
(85,036
)
 
(70,894
)
Tax contingencies
(24,036
)
 
17,889

 
5,194

Other assets and liabilities
11

 
3,029

 
(224
)
Net cash provided by (used in) operating activities - continuing operations
6,621

 
28,190

 
(13,361
)
Net cash (used in) provided by operating activities - discontinued operations
—

 
(1,277
)
 
11,807

Net cash provided by (used in) operating activities
6,621

 
26,913

 
(1,554
)
Cash flows from investing activities:
 
 
 
 
 
Purchase of other assets
—

 
(1,131
)
 
—

Proceeds from sale of Starhome B.V., net of cash sold of $30.9 million
—

 
6,340

 
—

Purchase of property and equipment
(12,341
)
 
(5,402
)
 
(5,371
)
Net change in restricted cash and bank time deposits
(26,918
)
 
(4,678
)
 
(4,432
)
Other, net
962

 
389

 
1,068

Net cash used in investing activities
(38,297
)

(4,482
)
 
(8,735
)
Cash flows from financing activities:
 
 
 
 
 
Decrease in net investment by CTI
—

 
1,052

 
(7,861
)
Borrowings under note payable to CTI
—

 
9,500

 
1,500

CTI capital contribution
25,000

 
38,500

 
—

Repayment of line of credit and other financing obligations
—

 
—

 
(6,031
)
Repurchase of common stock
(991
)
 
(33
)
 
—

Proceeds from exercises of stock options
1,108

 
233

 
—

Other, net
1

 
—

 
(25
)
Net cash provided by (used in) financing activities
25,118

 
49,252

 
(12,417
)
Effects of exchange rates on cash and cash equivalents
(1,783
)
 
(1,954
)
 
2,860

Net (decrease) increase in cash and cash equivalents
(8,341
)
 
69,729

 
(19,846
)
Cash and cash equivalents, beginning of year including cash from discontinued operations
262,921

 
193,192

 
213,038

Cash and cash equivalents, end of year including cash from discontinued operations
254,580

 
262,921

 
193,192

Less: cash and cash equivalents of discontinued operations, end of year
—

 
—

 
(32,466
)
Cash and cash equivalents, end of year
$
254,580

 
$
262,921

 
$
160,726

The accompanying notes are an integral part of these consolidated and combined financial statements.

F-7

COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

1.
ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Background
Prior to October 31, 2012, the date of the Share Distribution (as defined below), Comverse, Inc. (the “Company”) was a wholly-owned subsidiary of Comverse Technology, Inc. (“CTI”). The Company was organized as a Delaware corporation in November 1997.
The Company is a leading provider of telecom business enablement solutions for communication service providers (“CSPs”) through a portfolio of product-based solutions and associated services in the following domains:
•
Business Support Systems. The Company provides converged, prepaid and postpaid billing and active customer management systems (“BSS”) for wireless, wireline, cable and multi-play CSPs, delivering a value proposition designed to enable an effective service and data monetization, a consistent, enhanced customer experience, reduced complexity and cost, and real-time choice and control.
•
Policy Solutions. The Company provides CSPs with the ability to better manage their data networks and to better monetize their data network investment through its Policy Management and Policy Enforcement capabilities for wireless and wireline data networks.
•
Digital Services. The Company enables network-based voice and messaging (including voicemail, visual voicemail, call completion, short messaging service ("SMS"), and multimedia picture and video messaging ("MMS")), and digital lifestyle services and Internet Protocol ("IP") based rich communication services (including group chat, file transfer, video share, social, presence and geo-location information).
•
Managed and Professional Services. The Company offers a portfolio of services related to its solutions following the completion of the delivery of the project to the customer (referred to as managed services).
The Share Distribution
On October 31, 2012, CTI completed the spin-off of the Company as an independent, publicly-traded company, accomplished by means of a pro rata distribution of 100% of the Company's outstanding common shares to CTI's shareholders (the “Share Distribution”). Following the Share Distribution, CTI no longer holds any of the Company's outstanding capital stock, and the Company is an independent publicly-traded company.
Immediately prior to the Share Distribution, CTI contributed to the Company Exalink Ltd. (“Exalink”), CTI's wholly-owned subsidiary. Other than holding certain intellectual property rights, Exalink has no operations. Following the Share Distribution, the Company and CTI operated independently, and neither had any ownership interest in the other. In order to govern certain ongoing relationships between CTI and the Company after the Share Distribution and to provide mechanisms for an orderly transition, CTI and the Company entered into agreements pursuant to which certain services and rights are provided for following the Share Distribution, and CTI and the Company agreed to indemnify each other against certain liabilities that may arise from their respective businesses and the services that are provided under such agreements. Following the completion of CTI's merger with Verint Systems Inc. (“Verint”) discussed below, these obligations continue to apply between the Company and Verint (see Note 3, Expense Allocations and Share Distribution Agreements).
Upon completion of the Share Distribution, the Company's shares were listed, and began trading, on NASDAQ under the symbol “CNSI.” In connection with the Share Distribution, the Company (1) recapitalized its Net Investment of CTI with its common stock, whereby each holder of CTI common shares outstanding as of the record date for the Share Distribution received one share of the Company's common stock for every ten CTI common shares held thereby, which resulted in the issuance of approximately 21.9 million shares of the Company's common stock, (2) received contributions from CTI of $38.5 million in cash and $1.4 million of property and equipment based on CTI's book value, (3) recorded transfers of lease deposits of $0.8 million and deferred lease cost of $1.0 million from CTI, (4) assumed $0.7 million of employee related liabilities transferred to the Company from CTI, and (5) settled borrowings under a revolving loan agreement of $9.0 million and note payable by the Company to CTI of $9.4 million through a capital contribution to the Company's equity by CTI (see Note 11, Debt). In addition, on November 1, 2012 in connection with the Share Distribution, CTI's equity-based compensation awards held by the Company's employees were replaced with the Company's equity-based compensation awards (see Note 15, Stock-Based Compensation).

F-8
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




Merger of CTI and Verint
On August 12, 2012, CTI entered into an agreement and plan of merger (the “Verint Merger Agreement”) with Verint, its then majority-owned publicly-traded subsidiary, providing for the merger of CTI with and into a subsidiary of Verint to become a wholly-owned subsidiary of Verint (the “Verint Merger”). The Verint Merger was completed on February 4, 2013. The Company agreed to indemnify CTI and its affiliates (including Verint after the Verint Merger) against certain losses that may arise as a result of the Verint Merger and the Share Distribution (see Note 3, Expense Allocations and Share Distribution Agreements). On February 4, 2013, in connection with the closing of the Verint Merger Agreement, CTI placed $25.0 million in escrow to support indemnification claims to the extent made against the Company by Verint and any cash balance remaining in such escrow fund 18 months after the closing of the Verint Merger (the "Escrow Release Date"), less any claims made on or prior to such date, will be released to the Company. Although no indemnification claims have been filed and the Escrow Release Date is within 12 months of January 31, 2014, the Company continues to classify the restricted cash balance as "Long-term restricted cash" in the Consolidated Balance Sheets until it can be determined if any future claims would restrict the release of such escrow funds. As of the closing of the Verint Merger, the Company recognized the estimated fair value of the potential indemnification liability of $4.0 million with the remaining $21.0 million as an additional contribution from CTI. As of January 31, 2014, the estimated fair value of the potential indemnification liability is $3.8 million.
Contribution and Sale of Starhome
Starhome was a CTI subsidiary (66.5% owned as of January 31, 2012). On August 1, 2012, CTI, certain other Starhome shareholders and Starhome entered into a Share Purchase Agreement (the “Starhome Share Purchase Agreement”) with Fortissimo Capital Fund II (Israel), L.P., Fortissimo Capital Fund III (Israel), L.P. and Fortissimo Capital Fund III (Cayman), L.P. (collectively, “Fortissimo”) pursuant to which Fortissimo agreed to purchase all of the outstanding share capital of Starhome (the “Starhome Disposition”). On September 19, 2012, CTI, in order to ensure it could meet the conditions of the Verint Merger, contributed to the Company its interest in Starhome, including its rights and obligations under the Starhome Share Purchase Agreement. The Starhome Disposition was completed on October 19, 2012.
As a result of the Starhome Disposition, the results of operations of Starhome, including the gain on sale of Starhome, net of tax, are included in discontinued operations, less applicable income taxes, as a separate component of net income (loss) in the Company’s consolidated and combined statements of operations for the fiscal years ended January 31, 2013 and 2012 (see Note 16, Discontinued Operations).
Basis of Presentation
The consolidated and combined financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The Company’s combined financial statements for the periods prior to the Share Distribution have been derived from the consolidated financial statements and accounting records of CTI, using the historical results of operations, and historical basis of assets and liabilities of the Company’s businesses, which operated under common control of CTI. The Company’s combined financial statements combine, on the basis of common control, the results of operations and financial position of the Company and its subsidiaries with Starhome (66.5% owned by CTI as of January 31, 2012) and Exalink prior to CTI contributing Starhome and Exalink to the Company on September 19, 2012 and October 31, 2012, respectively. Management believes the assumptions and methodologies underlying the allocation of general, corporate expenses from CTI are reasonable (see Note 3, Expense Allocations and Share Distribution Agreements). However, such expenses may not be indicative of the actual level of expense that would have been incurred by the Company if it had operated as an independent, publicly-traded company. As such, the combined financial statements for periods prior to the Share Distribution included herein may not necessarily reflect what its results of operations, financial position, comprehensive income (loss) or cash flows would have been had the Company been an independent company during the periods presented. Subsequent to the Share Distribution, the financial statements are consolidated.
Prior to the Share Distribution, transactions between the Company and CTI and CTI’s other subsidiaries were identified in the consolidated and combined financial statements as transactions between related parties (see Note 22, Related Party Transactions).
For the purposes of the consolidated and combined statements of cash flows, prior to the Share Distribution, the Company reflected changes in unpaid balances with CTI as a financing activity.
Intercompany accounts and transactions within the Company have been eliminated.


F-9
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




Segment Reporting
The Company determines its reportable segments in accordance with the Financial Accounting Standards Board's (the “FASB”) guidance relating to disclosures about segments of an enterprise and related information. The Company's Chief Executive Officer is its chief operating decision maker (the “CODM”). The CODM uses segment performance as its primary basis for assessing the financial results of the operating segments and for the allocation of resources (see Note 20, Business Segment Information, for additional discussion, including the definition of segment performance).
The Company's operating and reportable segments are as follows:
•
BSS, which conducts the Company's converged, prepaid and postpaid billing and active customer management systems business along with its policy solutions products and includes groups engaged in product management, delivery, support, professional services, research and development and product sales support; and
•
Digital Services, which conducts the Company's digital services business and includes groups engaged in product management, delivery, support, professional services, research and development and product sales support.
The Company does not maintain separate balance sheets for the BSS and Digital Services segments.
The results of operations of the Company's global corporate functions, that provide common support to its segments, are included in the column captioned “All Other” as part of the Company's business segment presentation. All Other includes sales, marketing, finance, legal, and management as they provide services to both the BSS and Digital Services segments. In addition, there are certain delivery, support, and research and development groups that provide common support to the BSS and Digital Services segments, and therefore the costs of these common groups are included in All Other.
Starhome's results of operations are included in discontinued operations and therefore not presented in segment information.
Historically, Mobile Internet (“Comverse MI”), which was renamed Policy and is responsible for the Company's mobile Internet and policy products, and Netcentrex, an IP-based solution that provides carrier-hosted enterprise and consumer IP services, were included in All Other. Effective in the three months ended January 31, 2014 ("fourth quarter of fiscal 2013"), Comverse MI and Netcentrex have been combined with the Comverse BSS and Comverse Value Added Services (“VAS”) segments, respectively, to form the “BSS” and “Digital Services” segments. The change in segment reporting aligns with information reviewed by the Company's CODM, a change in management structure and the convergence of operations to take advantage of potential synergies. Accordingly, the results presented under segment reporting reflect the change in segment reporting for all periods presented to conform to the current period segment reporting structure. The change in segment reporting does not affect the Company’s previously reported consolidated and combined financial statements.
Use of Estimates
The preparation of the consolidated and combined financial statements and the accompanying notes in conformity with U.S. GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses.
The most significant estimates among others include:
•
Estimates relating to the recognition of revenue, including the determination of vendor specific objective evidence (“VSOE”) of fair value and the determination of best estimate of selling price for multiple element arrangements;
•
Fair value of stock-based compensation;
•
Fair value of reporting units for the purpose of goodwill impairment testing;
•
Realization of deferred tax assets;
•
The identification and measurement of uncertain tax positions;
•
Contingencies and litigation;
•
Total estimates to complete on percentage-of-completion (“POC”) projects;
•
Valuation of inventory;
•
Israel employees severance pay;
•
Probability assessment of performance based stock units vesting;
•
Allowance for doubtful accounts;
•
Valuation of other intangible assets; and
•
Allocation of expenses by CTI to the Company.

F-10
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




The Company’s actual results may differ from its estimates.
Functional Currency and Foreign Currency Translation and Transactions
The determination of the functional currency for the Company's foreign subsidiaries is made based on appropriate economic factors, including the currency in which the subsidiary sells its products, the sales market in which the subsidiary operates and the currency in which the subsidiary's financing is denominated. For foreign subsidiaries whose functional currency is not the U.S. dollar, assets and liabilities are translated using current exchange rates at the balance sheet date, and income and expense accounts using average exchange rates for the period, except revenue previously deferred which is translated using historical rates. The resulting foreign currency translation adjustments are reported as a separate component of “Other comprehensive income (loss), net of tax” in the consolidated and combined statements of comprehensive income (loss). For foreign subsidiaries whose functional currency is not the local currency, remeasurement gains and losses are recorded during each period in “Other expense, net” in the consolidated and combined statements of operations.
Unrealized and realized foreign currency transaction gains and losses on transactions denominated in currencies other than the functional currency of the entity are included in the consolidated and combined statements of operations in “Other expense, net” for the period in which the exchange rates changed.
Cash and Cash Equivalents
Cash primarily consists of cash on hand and bank deposits. Cash equivalents primarily consist of interest-bearing money market accounts, commercial paper, agency notes and other highly liquid investments with an original maturity of three months or less when purchased. The Company maintains cash and cash equivalents in U.S. dollars and in foreign currencies, which are subject to risks related to foreign currency exchange rate fluctuations.
Restricted Cash and Bank Time Deposits
Restricted cash and bank time deposits include compensating cash balances related to existing lines of credit and deposits that are pledged as collateral or restricted for use to settle specified performance guarantees to customers and vendors, letters of credit, indemnification claims, foreign currency transactions in the ordinary course of business and pending tax judgments. Cash expected to be restricted for more than one year from the balance sheet date is classified as long-term restricted cash. Restricted bank time deposits generally consist of certificates of deposit with original maturities of twelve months or less.
Accounts Receivable, Net
The application of revenue recognition guidance often results in circumstances for which the Company is unable to recognize revenue relating to sales transactions that have been billed. In these circumstances, the Company does not recognize the deferred revenue or the related accounts receivable and no amounts are recognized in the consolidated balance sheets for such transactions with the exception of certain arrangements recognized in accordance with the FASB's guidance relating to accounting for performance of construction-type and certain production-type contracts. Only to the extent that the Company has recognized revenue and not received cash for such transactions are amounts included in “Accounts receivable, net.” Also, only to the extent that the Company has received cash for such transactions is the amount included in “Deferred revenue” in the consolidated balance sheets.
Accounts receivable, net includes $13.9 million and $15.5 million of a long-term contract as of January 31, 2014 and 2013, respectively, which has associated corresponding deferred revenue classified in current liabilities of $46.5 million and $44.6 million as of January 31, 2014 and 2013, respectively.
Allowance for Doubtful Accounts
The Company estimates the collectability of its accounts receivable balances for each accounting period and adjusts its allowance for doubtful accounts accordingly. The Company exercises judgment in assessing the collectability of accounts receivable, including consideration of current economic conditions, the creditworthiness of customers, their collection history and the related aging of past due receivables balances. The Company evaluates specific accounts when it becomes aware that a customer may be experiencing a deterioration of its financial condition due to lower credit ratings, bankruptcy or other factors that may affect such customer's ability to meet its payment obligations. The Company expenses uncollectible trade receivables when all collection efforts have been exhausted and the Company believes the amount will not be collected.

F-11
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




 
 
Balance at 
Beginning
of Fiscal Year
 
Additions 
Charged
(Credited) to 
Expenses
 
Net Deductions
(Recoveries)
 
Other
 
Balance at End
of Fiscal Year
 
 
(In thousands)
Allowance for doubtful accounts:
 
 
 
 
 
 
 
 
 
 
Fiscal Year Ended January 31, 2014
 
$
8,841

 
$
1,293

 
$
(3,132
)
 
$
(57
)
 
$
6,945

Fiscal Year Ended January 31, 2013
 
9,168

 
518

 
(928
)
 
83

 
8,841

Fiscal Year Ended January 31, 2012
 
7,669

 
4,811

 
(3,166
)
 
(146
)
 
9,168

Investments
The Company accounts for investments in accordance with the FASB's guidance relating to accounting for certain investments in debt and equity securities. Purchases are recorded on the settlement date.
Interest on short-term investments is recognized in the consolidated and combined statements of operations when earned. Realized gains and losses on available-for-sale securities are recognized when securities are sold and are calculated using the specific identification method, and are recorded in “Other expense, net” in the consolidated and combined statements of operations. Unrealized gains and losses, net of taxes, are recorded as a component of “Accumulated other comprehensive income” in the consolidated and combined statements of equity.
Generally, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments.
The Company reviews its investments for indications of impairment in value on a quarterly basis. The Company considers an investment to be impaired when the fair value is less than the carrying value (or amortized cost). The Company evaluates each impaired investment individually to determine whether such investment is other-than-temporarily impaired.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out or weighted-average methods which approximates the first-in, first-out method. The Company reduces the carrying value of inventory when it holds excess or obsolete inventories determined through an evaluation of both historical usage and expected future demand. Part of the raw materials comprises software licenses, which are capitalized into inventory upon purchase from a vendor when the license will be used by the Company as part of its deliverables to its customers. Such expenses are included as a component of “Product costs” in the consolidated and combined statements of operations.
The Company evaluates slow moving or obsolete inventory for impairment. Raw material hardware is evaluated based upon utilization and projected usage. Raw material software is written-off upon determination that licenses will no longer be used in products nor can be converted to use within the organization or with other licenses/products.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and amortization. The Company depreciates and amortizes its property and equipment on a straight-line basis. Leasehold improvements are capitalized and amortized over the shorter of their estimated useful lives or the related lease term. The cost of maintenance and repairs is expensed as incurred. The estimated useful lives of property and equipment are as follows:
 
Useful Life in Years 
 
Shortest 
 
Longest 
Lab equipment
5
 
5
Technology equipment
3
 
7
Software
1
 
5
Leasehold improvements
3
 
15
Production equipment
1
 
6
Furnishings
3
 
10

F-12
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




Business Combinations
The Company allocates the fair value of consideration transferred in a business combination to the estimated fair value at the acquisition date of the tangible and intangible assets acquired, the liabilities assumed and any non-controlling interest. Acquisition costs are expensed as incurred. Any residual consideration is recorded as goodwill. The fair value of consideration includes cash, equity securities, other assets and contingent consideration. The Company remeasures the fair value of contingent consideration at each reporting period and any change in the fair value from either the passage of time or events occurring after the acquisition date, is recorded in earnings. The Company's determination of the fair values of assets acquired and liabilities assumed requires the Company to make significant estimates, primarily with respect to intangible assets. These estimates can include, but are not limited to, cash flow projections for the acquired business, and the appropriate weighted-average cost of capital. The results of operations of the acquired business are included in the Company's consolidated and combined results of operations from the date of the acquisition. The Company had no business combinations in any period presented.
Noncontrolling Interest
Noncontrolling interest represents the minority shareholders' interest in Starhome, the Company's former majority-owned subsidiary (see Note 16, Discontinued Operations). The Company recognizes income attributable to the noncontrolling interest as a separate component of net income (loss) in the Company's consolidated and combined statements of operations.
Prior to the Starhome Disposition, the noncontrolling interest of Starhome was 33.5%.
Goodwill
Goodwill represents the excess of the fair value of consideration transferred in a business combination over the fair value of tangible and intangible assets acquired net of the fair value of liabilities assumed and the fair value of any noncontrolling interest in the acquiree. The Company has no indefinite-lived intangible assets other than goodwill. The carrying amount of goodwill is reviewed annually for impairment on November 1 and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
The Company applies the FASB's guidance when testing goodwill for impairment which permits the Company to make a qualitative assessment of whether goodwill is impaired, or opt to bypass the qualitative assessment, and proceed directly to performing the first step of the two-step impairment test. If the Company performs a qualitative assessment and concludes it is more-likely-than-not that the fair value of a reporting unit exceeds its carrying value, goodwill is not considered impaired and the two-step impairment test is unnecessary. However, if the Company concludes otherwise, it is then required to perform the first step of the two-step impairment test.
The Company has the unconditional option to bypass the qualitative assessment for any reporting unit and proceed directly to performing the first step of the goodwill impairment test. The Company may resume performing the qualitative assessment in any subsequent period.
For reporting units where the Company decides to perform a qualitative assessment, the Company's management assesses and makes judgments regarding a variety of factors which potentially impact the fair value of a reporting unit, including general economic conditions, industry and market-specific conditions, customer behavior, cost factors, financial performance and trends, strategies and business plans, capital requirements, management and personnel issues, and stock price, among others. Management then considers the totality of these and other factors, placing more weight on the events and circumstances that are judged to most affect a reporting unit's fair value or the carrying amount of its net assets, to reach a qualitative conclusion regarding whether it is more-likely-than-not that the fair value of a reporting unit exceeds its carrying amount.
For reporting units where the Company performs the two-step goodwill impairment test, the first step requires the Company to compare the fair value of each reporting unit to the carrying value of its net assets. The Company considers both an income-based approach using projected discounted cash flows and a market-based approach using multiples of comparable companies to determine the fair value of its reporting units. The Company's estimate of fair value of each reporting unit is based on a number of subjective factors, including: (i) the appropriate weighting of valuation approaches (income-based approach and market-based approach), (ii) estimates of the future revenue and cash flows, (iii) discount rate for estimated cash flows, (iv) selection of peer group companies for the market-based approach, (v) required levels of working capital, (vi) assumed terminal value, (vii) the time horizon of cash flow forecasts; and (viii) control premium.
If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired and no further evaluation is necessary. If the carrying value of the reporting unit is greater than the estimated fair value of the reporting unit, there is an indication that impairment may exist and the second step is required. In the second step, the implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the fair value assigned to its assets and liabilities. If

F-13
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




the implied fair value of goodwill is less than the carrying value of the reporting unit's goodwill, the difference is recognized as an impairment charge.
The Company recorded an impairment charge of approximately $5.6 million for the fiscal year ended January 31, 2013. The Company did not record any impairment of goodwill for the fiscal years ended January 31, 2014 and 2012.
The Company's forecasts and estimates are based on assumptions that are consistent with the plans and estimates used to manage the business. Changes in these estimates could change the conclusion regarding an impairment of goodwill.
Impairment of Long-Lived and Intangible Assets
The Company reviews the recoverability of its long-lived assets, such as property and equipment and intangible assets with finite lives, whenever events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. Any impairment of these assets must be considered prior to the Company's impairment review of goodwill. The assessment of impairment is based on the Company's ability to recover the carrying value of the asset by analyzing the expected future undiscounted pre-tax cash flows specific to the asset or asset group.
Circumstances which could trigger a review include, but are not limited to, significant decreases in the market price of the asset, significant adverse changes in the business climate or legal factors, accumulation of costs significantly in excess of the amount expected for the acquisition of a long-lived asset, current period negative cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset.
The Company assesses the recoverability of the carrying value of long-lived assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. If undiscounted cash flows are less than the carrying value of such asset or asset group, an impairment loss is measured based on the difference between estimated fair value and carrying value. An impairment loss on intangible assets is reported as “Impairment of intangible assets” in the consolidated and combined statements of operations. Assets to be disposed of are written-down to the greater of fair value or salvage value. Estimated fair values are based on assumptions regarding the amount and timing of estimated future cash flows and appropriate discount rates to reflect varying degrees of perceived risk.
The Company did not record any impairment of intangible assets for the fiscal years ended January 31, 2014, 2013 and 2012.
Fair Value Measurements
Under the FASB's guidance, fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., “the exit price”).
In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. The FASB's guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a company's judgment concerning the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1-Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment.
Level 2-Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3-Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or liability is classified in its entirety based on the lowest level of input that is significant to the measurement of fair value.
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the

F-14
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




Company's own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation.
The FASB's guidance requires that the valuation techniques used are consistent with at least one of the three possible approaches: the market approach, income approach, and/or cost approach. The Company's Level 2 valuations use the market approach and are based on significant other observable inputs such as quoted prices for financial instruments not traded on a daily basis.
The FASB's guidance relating to the fair value option for financial assets and financial liabilities permits an instrument-by-instrument irrevocable election to account for selected financial instruments at fair value. The Company elected not to apply the fair value option to any eligible financial assets or financial liabilities.
The Company also elected not to apply the fair value option for non-financial assets and non-financial liabilities.
Derivative Instruments and Hedge Accounting
As part of the Company's risk management strategy, it uses derivative financial instruments, primarily forward contracts, to hedge against certain foreign currency exposures. The Company recognizes all derivatives as either assets or liabilities in the consolidated balance sheets at their fair value on a trade date basis. Short-term derivatives in a gain position are reported in “Prepaid expenses and other current assets” in the consolidated balance sheets and derivatives in a loss position are recorded in “Other current liabilities” in the consolidated balance sheets.
In order to qualify for hedge accounting, the Company formally documents at the inception of each hedging relationship the hedging instrument, the hedged item, the risk management objective and strategy for undertaking each hedging relationship, and the method used to assess hedge effectiveness, which includes the Company's assessment of the creditworthiness of each party and their ability to comply with the contractual terms of the hedging derivative.
When derivative financial instruments qualify for cash flow hedge accounting, the Company records the effective portion of changes in fair value as part of other comprehensive income (loss) in the consolidated and combined statements of equity. When the hedged item is recognized in the consolidated and combined statements of operations, the related derivative gain or loss is reclassified from “Accumulated other comprehensive income (loss)” in the consolidated and combined statements of equity to the consolidated and combined statements of operations within the line item in which the hedged item is recorded. The cash flows from a derivative financial instrument qualifying for cash flow hedge accounting are classified in the consolidated and combined statements of cash flows in the same category as the cash flows from the hedged item.
If a derivative financial instrument does not qualify for hedge accounting, the Company records the changes in fair value of derivative instruments in “Other expense, net” in the consolidated and combined statements of operations.
The Company does not purchase, hold or sell derivative financial instruments for trading and speculative purposes.
Concentration of Credit Risk
Financial instruments, which potentially expose the Company to credit risk, consist primarily of investments, derivatives and accounts receivable. From time to time, the Company invests excess cash in high credit-quality financial institutions and invests primarily in money market funds placed with major banks and financial institutions and corporate commercial paper. The Company believes that the financial institutions that hold its cash and liquid investments are financially sound and accordingly minimal credit risk exists with respect to these balances.
A significant portion of accounts receivable are with communication service providers. However, the concentration of credit risk is diversified due to the large number of commercial and government entities comprising the Company's customer base and their dispersion across different industries and geographic regions. The Company manages credit risk on trade accounts receivable by performing ongoing credit evaluations of its customers' financial condition and limiting the extension of credit when deemed necessary.
For the fiscal years ended January 31, 2014 and 2013, one customer represented approximately 18% and 14%, respectively, of total revenue, in which revenue is attributable to the Digital Services segment. No customer accounted for 10% or more of total revenue for the fiscal year ended January 31, 2012.
For the fiscal years ended January 31, 2014 and 2013, one customer accounted 16% and 13% of the combined accounts receivable as of January 31, 2014 and 2013, respectively. The revenues related to these receivables have been completely deferred in each of the periods presented. Additionally, another customer accounted for 13% of the combined accounts receivable as of January 31, 2013. The Company believes that no significant customer credit risk exists other than what is reserved.

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The Company depends on a limited number of suppliers and manufacturers for certain components and is exposed to the risk that these suppliers and manufacturers will not be able to fill its orders on a timely basis and at the specifications it requires.
Revenue Recognition
The Company reports its revenue in two categories: (i) product revenue, including hardware and software products; and (ii) service revenue, including revenue from professional services, training services and post-contract customer support (“PCS”). Professional services primarily include installation, customization and consulting services.
The Company's revenue is accounted for in accordance with the FASB's guidance relating to multiple element arrangements entered into or materially modified on or after February 1, 2011 that include hardware which functions together with software to provide the essential functionality of the product. Revenue recognition for software and (or) services arrangements are accounted under the FASB's new guidance applicable to multiple element arrangements. In applying the FASB's guidance, the Company exercises judgment and uses estimates in determining the revenue to be recognized in each accounting period.
For arrangements that do not require significant customization of the underlying software, the Company recognizes revenue when it has persuasive evidence of an arrangement, the product has been shipped and the services have been provided to the customer, the sales price is fixed or determinable, collectability is probable, and all other pertinent criteria are met as required by the FASB's guidance.
In certain instances, payment terms extend beyond the Company's customary practices. In these situations, if a customer does not have an adequate history of abiding by its contractual payment terms without concessions, the sales price is not considered fixed or determinable. As such, revenue recognition commences upon collection, provided all other revenue recognition criteria have been met.
Under certain contractual arrangements, the Company is required to pay a penalty or liquidated damages if delivery of the Company's products and installation services are not completed by a certain date. In other arrangements, the Company has guaranteed product performance and warranty service response rates, which, if not met, can result in penalties. The Company assesses whether such penalties are akin to a warranty provision or contingent revenue. To the extent that the penalties are akin to a warranty provision, the Company accounts for such penalties or liquidated damages in accordance with the FASB's guidance relating to contingencies.
Shipping and handling amounts billed to the Company's customers are included in product revenue and the related shipping and handling costs are included in product costs.
The Company reports revenue net of any revenue-based taxes assessed by governmental authorities that are imposed on and concurrent with specific revenue producing transactions.
The following are the specific revenue recognition policies for each major category of revenue.
Multiple Element Arrangements
Revenue arrangements may incorporate one or more elements in a single transaction or combination of related transactions. In September 2009, the FASB issued revenue recognition guidance applicable to multiple element arrangements, which applies to multiple element revenue arrangements that contain both software and hardware elements, focusing on determining which revenue arrangements are within the scope of the software revenue guidance; and addresses how to separate consideration related to each element in a multiple element arrangement, excluding software arrangements, and establishes a hierarchy for determining the selling price of an element. It also eliminates the residual method of allocation by requiring that arrangement consideration be allocated at the inception of the arrangement to all elements using the relative selling price method.
Certain of the Company's multiple element arrangements include hardware that functions together with software to provide the essential functionality of the product. Therefore, such arrangements entered into or materially modified on or after February 1, 2011 are no longer accounted for in accordance with the FASB's software accounting guidance. Accordingly, the selling price used for each deliverable is based on VSOE of fair value, if available, third party evidence (“TPE”) of fair value if VSOE is not available, or the Company's best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. In determining the units of accounting for these arrangements, the Company evaluates whether each deliverable has stand-alone value as defined in the FASB's guidance. Given that the hardware and software function together to provide the essential functionality of the product and each element is critical to the overall tangible product sold, neither the software nor the hardware have stand-alone value. Professional services performed prior to the product's acceptance do not have stand-alone value and are therefore combined with the related hardware and software as one non-software deliverable. After determining

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the fair value for each deliverable, the arrangement consideration is allocated using the relative selling price method. Revenue is recognized accordingly for each deliverable once the respective revenue recognition criteria are met for that deliverable.
The Company has not yet established VSOE of fair value for any element other than PCS for a portion of its arrangements. Generally, the Company is not able to determine TPE because its offerings contain a significant level of differentiation such that the comparable pricing of substantially similar products or services cannot be obtained. When the Company is unable to establish fair value of its non-software deliverables using VSOE or TPE, it uses BESP in its allocation of arrangement consideration. The objective of BESP is to determine the price at which it would transact a sale if the product or service were sold on a stand-alone basis, which requires significant judgment. The Company determines BESP for a product or service by considering multiple factors, including, but not limited to, cost of products, gross margin objectives, pricing practices, geographies and customer classes. The Company exercises judgment and uses estimates in determining the revenue to be recognized in each accounting period.
The majority of multiple element arrangements contain at least two of the following elements: (1) tangible product (hardware, software, and professional services performed prior to the product's acceptance), (2) PCS, (3) training, and (4) post acceptance services. The Company's tangible products are rarely sold separately. In addition, the Company's tangible products are complex, and contain a high degree of customizations such that the Company is unable to demonstrate pricing within a pricing range to establish BESP as very few contracts are comparable. Therefore, the Company has concluded that cost plus a target gross profit margin provides the best estimate of the selling price.
PCS, training, and post acceptance services have various pricing practices based on several factors, including the geographical region of the customer, the size of the customer's installed base, the volume of services being sold and the type or class of service being performed. As noted above, the Company has VSOE of PCS for a portion of its arrangements. For PCS, the Company uses its minimum substantive VSOE thresholds by region plus a reasonable margin as the basis to estimate BESP of PCS for transactions that do not meet the VSOE criteria. For training and post-acceptance services, the Company performs an annual study of stand-alone training and post-acceptance sales to arrive at BESP. While the study does not result in VSOE, it is useful in determining the Company's BESP.
With the exception of arrangements that require significant customization of the product to meet the particular requirements of the customer, which are accounted for using the percentage-of-completion method, the initial revenue recognition for each non-software product only deliverable is generally upon completion of the related professional services.
For all multiple element arrangements without hardware, the Company allocates revenue to the delivered elements of the arrangement using the residual method, whereby revenue is allocated to the undelivered elements based on VSOE of fair value of the undelivered elements with the remaining arrangement fee allocated to the delivered elements and recognized as revenue assuming all other revenue recognition criteria are met. If the Company is unable to establish VSOE of fair value for the undelivered elements of the arrangement, revenue recognition is deferred for the entire arrangement until all elements of the arrangement are delivered. However, if the only undelivered element is PCS, the Company recognizes the arrangement fee ratably over the PCS period.
PCS revenue is derived primarily from providing technical software support services, unspecified software updates and upgrades to customers on a when and if available basis. PCS revenue is recognized ratably over the term of the PCS period. When PCS is included within a multiple element arrangement and the arrangement is within the scope of the software revenue guidance, the Company primarily utilizes the substantive renewal rate to establish VSOE of fair value for PCS.
The Company's policy for establishing VSOE of fair value for professional services and training is based upon an analysis of separate sales of services, which are then compared with the fees charged when the same elements are included in a multiple element arrangement. The Company has not yet established VSOE of fair value for any element other than PCS.
When using the substantive renewal rate method, the Company may be unable to establish VSOE of fair value for PCS because the renewal rate is deemed to be non-substantive or there are no contractually-stated renewal rates. If the stated renewal rate is non-substantive, the entire arrangement fee is recognized ratably over the estimated economic life of the product (five to eight years) beginning upon delivery of all elements other than PCS. The Company believes that the estimated economic life of the product is the best estimate of how long the customer will renew PCS. If there is no contractually stated renewal rate, the entire arrangement fee is recognized ratably over the relevant contractual PCS term beginning upon delivery of all elements other than PCS.
In certain multiple element arrangements, the Company is obligated to provide training services to customers related to the operation of the Company's software products. These training services are either provided to the customer on a “defined” basis (limited to a specified number of days or training classes) or on an “as-requested” basis (unlimited training over a contractual period).
For multiple element arrangements containing as-requested training obligations that are within the scope of the software revenue guidance, the Company recognizes the total arrangement consideration ratably over the contractual period during

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which the Company is required to “stand ready” to perform such training, provided that all other criteria for revenue recognition have been met.
For multiple element arrangements containing defined training obligations, the training services are typically provided to the customer prior to the completion of the installation services. For multiple element arrangements that are not within the scope of the software guidance, training is treated as a separate deliverable and recognized when delivered. For arrangements that are within the scope of the software revenue guidance, because revenue recognition does not commence until the completion of installation, the defined training obligations do not impact the timing of recognition of revenue. In certain circumstances in which training is provided after the end of the installation period, the Company commences revenue recognition upon the completion of training, provided that all other criteria for revenue recognition have been met.
In its multiple element arrangements the Company may offer a discount on future purchases of products and services. A discount is considered an additional element of an arrangement if the discount is considered more than insignificant. A more-than-insignificant discount with respect to future purchases is a discount that is: (i) incremental to the range of discounts reflected in the pricing of the other elements of the arrangement, (ii) incremental to the range of discounts typically given in comparable transactions, and (iii) significant. Insignificant discounts and discounts that are not incremental do not affect revenue recognition. If the discount is considered more than insignificant, then a portion of the fee received is deferred and recognized as revenue as the future purchases are made by the customer or upon expiration of the period that the discount is available.
Some of the Company's arrangements require significant customization of the product to meet the particular requirements of the customer. For these arrangements, revenue is typically recognized in accordance with the FASB's guidance for long-term construction type contracts using the POC method.
The determination of whether services entail significant customization requires judgment and is primarily based on alterations to the features and functionality to the standard release, complex or unusual interfaces as well as the amount of hours necessary to complete the customization solution relative to the size of the contract. Revenue from these arrangements is recognized on the POC method based on the ratio of total hours incurred to date compared to estimated total hours to complete the contract.
Management is required to make judgments to estimate the total estimated costs and progress to completion. Changes to such estimates can impact the timing of the revenue recognition period to period. The Company uses historical experience, project plans, and an assessment of the risks and uncertainties inherent in the arrangement to establish these estimates. Uncertainties in these arrangements include implementation delays or performance issues that may or may not be within the Company's control. If some level of profitability is assured, but the related revenue and costs cannot be reasonably estimated, then revenue is recognized to the extent of costs incurred until such time that the project's profitability can be estimated or the services have been completed. If the Company determines that based on its estimates its costs exceed the sales price, the entire amount of the estimated loss is accrued in the period that such losses become known.
The change in profit estimate of one BSS contract accounted for under the percentage of completion method negatively impacted income from operations by $14.8 million during the fiscal year ended January 31, 2013. Although there were no individually large profit estimate adjustments during fiscal year 2013, the fourth fiscal quarter ended January 31, 2014 was impacted by the recording of loss contract reserves of $7.1 million for three contracts accounted for under the Percentage of Completion method.
Revenue derived from sales to distributors, resellers, and value-added resellers are recognized when the resellers in turn sell the software product to their customers and installation of the software product has occurred, provided all other revenue recognition criteria are met. This is commonly referred to as the sell-through method. The contractual arrangements between the reseller and end user, or between the reseller and the Company, generally obligate the Company to provide services to the end user that are subject to end user acceptance. Further, payment terms are generally subject to the reseller's receiving payment from the end user and the end user's acceptance of the product. Therefore, the Company defers recognition until there is a “sell-through” by the reseller to an actual end user customer and acceptance by the end user.
In the consolidated and combined statements of operations, the Company classifies revenue as product revenue or service revenue. For multiple element arrangements that include both product and service elements, management evaluates various available indicators of fair value and applies its judgment to reasonably classify the arrangement fee between product revenue and service revenue. The amount of multiple element arrangement fees classified as product and service revenue based on management estimates of fair value when VSOE of fair value for all elements of an arrangement does not exist could differ from amounts classified as product and service revenue if VSOE of fair value for all elements existed. The allocation of multiple element arrangement fees between product revenue and service revenue, when VSOE of fair value for all elements does not exist, is for consolidated and combined financial statement presentation purposes only and does not affect the timing or amount of revenue recognized.

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




In determining the amount of a multiple element arrangement fee that should be classified between product revenue and service revenue, the Company first allocates the arrangement fee to product revenue and PCS (PCS is classified as service revenue) based on management's estimate of fair value for those elements. The remainder of the arrangement fee, which is comprised of all other service elements, is allocated to service revenue. The estimate of fair value of the product element is based primarily on management's evaluation of direct costs and reasonable profit margins on those products. This was determined to be the most appropriate methodology as the Company has historically been product-oriented with respect to pricing policies which facilitates the evaluation of product costs and related margins in arriving at a reasonable estimate of the product element fair value. Management's estimate of reasonable profit margins requires significant judgment and consideration of various factors, such as the impact of the economic environment on margins, the complexity of projects, the stability of product profit margins and the nature of products. The estimate of fair value for PCS is based on management's evaluation of the weighted-average of PCS rates for arrangements for which VSOE of fair value of PCS exists.
Post-Contract Customer Support Renewals
The Company's multiple element arrangements typically provide for renewal of PCS terms upon expiration of the original term. The amounts of these PCS renewals are recognized as revenue ratably over the specified PCS renewal period.
Professional Services Only Arrangements
Based on the type and nature of its professional-services-only arrangements, the Company recognizes revenue using either the proportional performance method, ratable recognition, completed performance method or on a time and materials basis. For fixed-fee arrangements recognized based on the proportional performance method, the Company typically measures progress to completion based on the ratio of hours incurred to total estimated project hours, an input method. For fixed-fee arrangements recognized based on the completed performance method, the Company recognizes revenue once the services are completed and there are no other obligations of the Company. The Company recognizes revenue for time and materials arrangements as the services are performed based on contractually stipulated billing rates.
Product and Service Costs
The Company's cost of revenue primarily consists of (i) material costs, (ii) compensation and related overhead expenses for personnel involved in the customization of its products, customer delivery and maintenance and professional services, (iii) contractor costs, (iv) royalties and license fees, (v) depreciation of equipment used in operations, and (vi) amortization of capitalized software costs and certain purchased intangible assets.
When revenue is recognized over multiple periods in accordance with the Company's revenue recognition policies, the material cost, including hardware and third party software license fees are deferred and amortized over the same period that product revenue is recognized. These costs are recognized as “Deferred cost of revenue” on the consolidated balance sheets. However, the Company has made an accounting policy election whereby the cost for installation and other service costs are expensed as incurred, except for arrangements recognized in accordance with the FASB's guidance for long-term construction type contracts.
For certain contracts where revenue is recognized in accordance with the FASB's guidance for long-term construction type contracts, revisions in estimates of costs are reflected in the accounting period in which the facts that require the revision become known. These costs include all direct material and labor costs and overhead related to contract performance.
Research and Development, Net
Research and development, net expenses primarily consist of personnel-related costs involved in product development and third party development and programming costs. Research and development costs are expensed as incurred.
A portion of the Company’s research and development operations are located in Israel, where certain of the Company’s subsidiaries derive benefits from participation in programs sponsored by the Government of Israel for the support of research and development activities in Israel. Certain of the Company’s research and development activities include projects partially funded by the Office of the Chief Scientist of the Ministry of Industry and Trade of the State of Israel (the “OCS”) under which the funding organization reimburses a portion of the Company’s research and development expenditures under approved project budgets. Although the Government of Israel does not own proprietary rights in the OCS-funded Products and there is no specific restriction by the OCS with regard to the export of the OCS-funded Products, under certain circumstances, there may be limitations on the ability to transfer technology, know-how and manufacturing of OCS-funded Products outside of Israel. Such limitations could result in the requirement to pay increased royalties or a redemption fee calculated according to the applicable regulations.

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




The Company’s gross research and development expenses for the fiscal years ended January 31, 2014, 2013 and 2012 were $67.6 million, $77.0 million and $94.3 million, respectively. Amounts reimbursable by the OCS and others for the fiscal years ended January 31, 2014, 2013 and 2012, were $0.1 million, $0.5 million and $0.1 million, respectively, which were recorded as a reduction to gross research and development expenses within “Research and development, net” in the consolidated and combined statements of operations.
Software Costs
Costs of software developed for internal use are capitalized in accordance with the FASB's guidance during the application development stage and are then amortized over the estimated useful life of the software, which to date has been five years or less once the software is ready for its intended use. These costs are included in “Property and equipment, net” in the consolidated balance sheets.
Sales and Marketing
Sales and marketing expenses include payroll, employee benefits, stock-based compensation, and other headcount-related expenses associated with sales and marketing personnel, and the costs of advertising, promotions and other programs. In addition, the Company's customer acquisition and origination costs, including sales and agent commissions are expensed when incurred, with the exception of certain sales referral fees that are capitalized and amortized ratably over the revenue recognition period. Advertising costs are expensed as incurred.
Stock-Based Compensation
Stock-based compensation expense is measured at the grant date based on the fair value of the award derived using the Black-Scholes option-pricing model and the cost is recognized as expense ratably over the award's vesting period, which generally vest ratably over two or three years and expire ten years from the date of grant. The Black-Scholes model requires making certain assumptions used within the model, the most significant of which are the stock price volatility assumption over the term of the awards and the expected life of the option award based on the actual and projected employee stock option behaviors. Other assumptions include the risk-free rate of return and dividends during the expected term.
The Company estimates expected forfeitures of stock-based awards at the grant date and recognizes compensation cost only for those awards expected to vest. Forfeiture rates are estimated based on historical experience of Comverse employees while employed by CTI prior to the Share Distribution. The forfeiture assumption is adjusted to the actual forfeitures that occur. Therefore, changes in the forfeiture assumptions may impact the amount and timing of the total amount of expense recognized over the vesting period. Estimated forfeitures are reassessed in subsequent periods and may change based on new facts and circumstances.
The fair value of equity instruments issued to a nonemployee is measured by using the stock price and other measurement assumptions as of the date earlier of either: (i) a commitment for performance by the nonemployee has been reached; or (ii) the counterparty's performance is complete. Expenses related to nonemployee awards are generally recognized in the same period and in the same manner as the Company incurs the related liability for goods and services received.
In connection with the Share Distribution, CTI's equity-based compensation awards held by the Company's employees were replaced with the Company's equity-based compensation awards on November 1, 2012. The replacement of CTI's equity-based compensation awards was considered a modification that resulted in a negligible increase in the fair value of the awards. The Company's combined statements of operations prior to the Share Distribution include expenses related to the Company's employee participation in the CTI plans.
APIC Pool
The long form method is used to determine the Company's pool of excess tax benefits available within additional paid-in capital. Excess tax benefits resulting from stock option exercises are recognized as additions to APIC in the period the benefit is realized. In the event of a shortfall (that is, the tax benefit realized is less than the amount previously recognized through periodic stock-based compensation expense recognition and related deferred tax accounting), the shortfall is charged against APIC to the extent of previous excess benefits, if any, including the hypothetical APIC pool, and then to tax expense.
Income Taxes
Income taxes are provided using the asset and liability method, such that income taxes (i.e., deferred tax assets, deferred tax liabilities, taxes currently payable/refunds receivable and tax expense/benefit) are recorded based on amounts refundable or payable in the current year and include the results of any difference between U.S. GAAP and tax reporting. Deferred income taxes reflect the tax effect of net operating losses, capital losses and general business credit carryforwards and the net tax effects

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of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates. Valuation allowances are established when management determines that it is more-likely-than-not that some portion or all of the deferred tax asset will not be realized. The financial effect of changes in tax laws or rates is accounted for in the period of enactment. The subsequent realization of net operating loss and general business credit carryforwards acquired in acquisitions accounted for using the acquisition method of accounting is recognized in the consolidated and combined statement of operations.
The Company was included in the CTI consolidated federal and certain combined state income tax returns until completion of the Share Distribution. As such, the Company was not a separate taxable entity for U.S. federal and certain state income tax purposes until completion of the Share Distribution. In addition, the Company did not have a written tax sharing agreement with CTI. The Company's provisions for income taxes and related balance sheet accounts were presented as if the Company were a separate taxpayer (“separate return method”). This method of allocating the CTI consolidated current and deferred income taxes was systematic, rational and consistent with the asset and liability method. The separate return method represented a hypothetical computation assuming that the reported revenue and expenses of the Company were incurred by a separate taxable entity. Accordingly, the reported provision for income taxes and the related balance sheet accounts (including but not limited to the NOL deferred tax assets) did not equal the amounts that were allocable to the Company under the applicable consolidated federal and state tax laws. Further, as the Company did not have a tax-sharing agreement with CTI in place, the expected payable was treated as a dividend to the parent.
From time to time, the Company has business transactions in which the tax consequences are uncertain. Significant judgment is required in assessing and estimating the tax consequences of these transactions. The Company prepares and files tax returns based on its interpretation of tax laws. In the normal course of business, the Company's tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax, interest and penalty assessments. In determining the Company's tax provision for financial reporting purposes, the Company establishes a liability for uncertain tax positions unless such positions are determined to be more-likely-than-not of being sustained upon examination, based on their technical merits. That is, for financial reporting purposes, the Company only recognizes tax benefits that it believes are more-likely-than-not of being sustained and then recognizes the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. There is considerable judgment involved in determining whether positions taken on the tax return are more-likely-than-not of being sustained and determining the likelihood of various potential settlement outcomes.
The Company adjusts its estimated liability for uncertain tax positions periodically because of new information discovered as a function of ongoing examinations by, and settlements with, the various taxing authorities, as well as changes in tax laws, regulations and interpretations. The combined tax provision of any given year includes adjustments to prior year income tax accruals that are considered appropriate as well as any related estimated interest. The Company's policy is to recognize, when applicable, interest and penalties on uncertain tax positions as part of income tax expense (see Note 19, Income Taxes).
As part of the Company's accounting for business combinations, some of the purchase price is allocated to goodwill and intangible assets. Impairment expenses associated with goodwill are generally not tax deductible and will result in an increased effective income tax rate in the fiscal period any impairment is recorded. Amortization expenses associated with acquired intangible assets are generally not tax deductible pursuant to the Company's existing tax structure; however, deferred taxes have been recorded for non-deductible amortization expenses as a part of the purchase price allocation process. The Company has taken into account the allocation of these identified intangibles among different taxing jurisdictions, including those with nominal or zero percent tax rates, in establishing the related deferred tax liabilities. Under the FASB's guidance, the income tax benefit from future releases of the acquisition date valuation allowances or income tax contingencies, if any, are reflected in the income tax provision in the consolidated and combined statements of operations, rather than as an adjustment to the purchase price allocation.

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




Accumulated Other Comprehensive Income
The following table summarizes the Company’s accumulated other comprehensive income as of the dates presented:
 
January 31,
 
2014
 
2013
 
(In thousands)
Foreign currency translations
$
23,274

 
$
21,276

Cash flow hedges, net of tax
58

 
475

Accumulated other comprehensive income
$
23,332

 
$
21,751

Contingencies
Contingencies by their nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss, if any. The Company accrues for costs relating to litigation, claims and other contingent matters when such liabilities become probable and reasonably estimable. Legal costs are expensed as incurred.
Restructuring
The Company has developed and implemented restructuring initiatives to improve efficiencies across the organization, reduce operating expenses, and better align its resources to market conditions. As a result of these plans, the Company has recorded restructuring expenses comprised principally of employee severance and associated termination costs related to the reduction of its workforce, office closures, losses on subleases and contract termination costs.
The Company recognizes a liability for costs associated with an exit or disposal activity when the liability is incurred, as opposed to when management commits to an exit plan. The Company measures the liabilities associated with exit and disposal activities at fair value. One-time termination benefits are expensed at the date the employees are notified, unless the employees must provide future services beyond a minimum retention period, in which case the benefits are expensed ratably over the future service periods.
Certain employees included in a termination plan may include employees in countries which require the Company by law to pay mandatory severance for involuntary termination based on years of service. A liability for the cost of the benefits would be recognized when payment is probable and estimable.
The Company recognizes a liability for office closures measured at its fair value when the Company ceases using the rights conveyed by the contract, based on the remaining lease rentals, adjusted for the effects of any prepaid or deferred items recognized under the lease. This liability is further reduced by estimated sublease rentals that could be reasonably obtained for the property regardless of the intention of the lessee to sublease the premises.
2.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company is currently classified as an emerging growth company and as such, can delay adopting new or revised accounting standards until such time as those standards apply to private companies. The Company has elected to follow the required adoption dates for private companies. Therefore, the adoption dates below reflect the Company's current classification.
Standards Implemented
In July 2012, the Financial Accounting Standards Board ("FASB") issued new accounting guidance on indefinite-lived intangible assets. The new guidance provides an entity the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more-likely-than-not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more-likely-than-not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount and recognize an impairment loss, if any, to the extent the carrying value exceeds its fair value. The guidance was effective for the Company for its annual impairment tests in the fiscal year ended January 31, 2014. The adoption of this guidance for the annual impairment test did not have any impact on its consolidated and combined financial statements.

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




Standards To Be Implemented
In February 2013, the FASB issued new accounting guidance on other comprehensive income. This topic will require the Company to provide information about the amounts reclassified out of accumulated other comprehensive income by component and the line items of net income to which significant amounts are reclassified. The guidance will be effective for the Company beginning February 1, 2014. The adoption of this guidance is anticipated to result in additional disclosures.
3.
EXPENSE ALLOCATIONS AND SHARE DISTRIBUTION AGREEMENTS
Expense Allocations
CTI provided a variety of services to the Company prior to the Share Distribution. CTI directly assigned, where possible, certain general and administrative costs to the Company based on actual use of those services. Where direct assignment of costs was not possible, or practical, CTI used other indirect methods to estimate the allocation of costs. Allocated costs include general support services such as information technology, legal services, human resource services, general accounting and finance, and executive support. Substantially all of these allocations are reflected in “Selling, general, and administrative” expenses in the Company’s combined statements of operations prior to the Share Distribution.
Employee compensation and overhead expenses were allocated utilizing a time study of CTI employees’ percentage of time spent on Company-related matters. External vendor expenses were allocated based on information provided by the vendor or an internal analysis of benefits derived by the Company from the services incurred by CTI.
The Company considered these expense allocations to be a reasonable reflection of the utilization of services provided. The allocations may not, however, reflect the expense the Company would have incurred as an independent company. Actual costs which may have been incurred if the Company had been an independent company for the fiscal years ended January 31, 2013 and 2012 would depend on a number of factors, including how the Company chose to organize itself, and what, if any, functions were outsourced or performed by the Company’s employees.
The following table presents the expense allocations from CTI reflected in the Company’s consolidated and combined statements of operations:
 
 
Fiscal Years Ended January 31,
 
 
2013
 
2012
 
 
(In thousands)
Employee compensation expenses
 
$
2,623

 
$
6,665

Overhead expenses and external vendor expenses
 
3,396

 
8,800

Total
 
$
6,019

 
$
15,465

Net Investment of CTI
CTI primarily used a centralized approach for cash management and for financing of its operations with all related activity between the Company and CTI, reflected as equity transactions in “Net investment of CTI” in the combined statement of equity as of January 31, 2012. Intercompany transactions between the Company and CTI primarily included: (i) borrowings from CTI used to fund operations and capital expenditures, as well as repayment thereof and (ii) allocations of CTI’s corporate expenses identified above. As disclosed in Note 1, in connection with the Share Distribution, the Company recapitalized its Net Investment of CTI with the issuance of the Company's common stock.
Certain loan arrangements between CTI and the Company that were not included in “Net investment of CTI” are disclosed in Note 11, Debt and Note 22, Related Party Transactions.

F-23
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




Share Distribution Agreements
The Company entered into a distribution agreement (the “Distribution Agreement”), transition services agreement, tax disaffiliation agreement and employee matters agreement (collectively, the “Share Distribution Agreements”) with CTI in connection with the Share Distribution. In particular, the Distribution Agreement, among other things, provides for the allocation between the Company and CTI of various assets, liabilities and obligations attributable to periods prior to the Share Distribution. Under the Distribution Agreement, the Company agreed to indemnify CTI and its affiliates (including Verint following the Verint Merger) against certain losses that may arise as a result of the Verint Merger and the Share Distribution. Certain of the Company's indemnification obligations are capped at $25.0 million and certain are uncapped. Specifically, the capped indemnification obligations include indemnifying CTI and its affiliates (including Verint after the Verint Merger) against losses stemming from breaches by CTI of representations, warranties and covenants in the Verint Merger Agreement and for any liabilities of CTI that were known by CTI but not included on the net worth statement delivered by CTI at the closing of the Verint Merger. The Company's uncapped indemnification obligations include indemnifying CTI and its affiliates (including Verint after the Verint Merger) against liabilities relating to the Company's business; claims by any shareholder or creditor of CTI related to the Share Distribution, the Verint Merger or related transactions or disclosure documents; certain claims made by employees or former employees of CTI and any claims made by employees and former employees of the Company (including but not limited to the Israeli optionholder suits discussed in Note 24, Commitments and Contingencies); any failure by the Company to perform under any of the agreements entered into in connection with the Share Distribution; claims related to CTI's ownership or operation of the Company; claims related to the Starhome Disposition; certain retained liabilities of CTI that are not reflected on or reserved against on the net worth statement delivered by CTI at the closing of the Verint Merger; and claims arising out of the exercise of appraisal rights by a CTI shareholder in connection with the Share Distribution. On February 4, 2013, in connection with the closing of the Verint Merger Agreement, CTI placed $25.0 million in escrow to support indemnification claims to the extent made against the Company by Verint and any cash balance remaining in such escrow fund 18 months after the closing of the Verint Merger, less any claims made on or prior to such date, will be released to the Company. The escrow funds cannot be used for claims related to the Israeli optionholder suits. Although no indemnification claims have been filed and the Escrow Release Date is within 12 months of January 31, 2014, the Company continues to classify the restricted cash balance as "Long-term restricted cash" in the Consolidated Balance Sheets until it can be determined if any future claims would restrict the release of such escrow funds. The Company also assumed all pre-Share Distribution tax obligations of each of the Company and CTI.
The Company and CTI entered into a tax disaffiliation agreement that governs their respective rights, responsibilities and obligations after the Share Distribution with respect to tax liabilities and benefits, tax attributes, tax contests and other tax matters regarding income taxes, other taxes and related tax returns. The Company and CTI also entered into an employee matters agreement, which allocates liabilities and responsibilities relating to employee compensation and benefit plans and programs.

F-24
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




4.
INVENTORIES
Inventories consist of the following:
 
January 31,
 
2014
 
2013
 
(In thousands)
Raw materials
$
11,445

 
$
17,318

Work in process
4,612

 
7,436

Finished goods
109

 
46

 
$
16,166

 
$
24,800


5.
PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of:
 
 
 
January 31,
 
 
2014
 
2013
 
 
(In thousands)
Lab equipment
 
$
68,958

 
$
74,093

Technology equipment
 
63,909

 
65,369

Software
 
27,006

 
26,762

Leasehold improvements
 
23,210

 
17,510

Production equipment
 
16,286

 
16,235

Furniture and fixtures
 
8,510

 
7,358

 
 
207,879

 
207,327

Less accumulated depreciation and amortization
 
(166,338
)
 
(169,885
)
Total
 
$
41,541

 
$
37,442


Depreciation and amortization expense of property and equipment was $16.3 million, $17.7 million and $16.9 million for the fiscal years ended January 31, 2014, 2013 and 2012, respectively. The Company also wrote off and disposed of property and equipment, net of $0.5 million, $0.4 million and $2.3 million during the fiscal years ended January 31, 2014, 2013 and 2012, respectively, recorded in "Selling, general and administrative" in the consolidated and combined statements of operations.

F-25
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




6.
GOODWILL
The changes in the carrying amount of goodwill in the Company’s reportable segments for the fiscal years ended January 31, 2014, 2013 and 2012 are as follows:
 

BSS (1)
 
Digital Services (2)
 
Total
 
(In thousands)
For the Year Ended January 31, 2012
 
 
 
 
 
Goodwill, gross, at January 31, 2011
$
89,654

 
$
222,495

 
$
312,149

Accumulated impairment losses at January 31, 2011
—

 
(156,455
)
 
(156,455
)
Goodwill, net, at January 31, 2011
89,654

 
66,040

 
155,694

Effect of changes in foreign currencies and other
(103
)
 
(74
)
 
(177
)
Goodwill, net, at January 31, 2012
$
89,551

 
$
65,966

 
$
155,517

For the Year Ended January 31, 2013
 
 
 
 
 
Goodwill, gross at January 31, 2012
$
89,551

 
$
222,421

 
$
311,972

Accumulated impairment losses at January 31, 2012
—

 
(156,455
)
 
(156,455
)
Goodwill, net, at January 31, 2012
89,551

 
65,966

 
155,517

Impairment of Comverse MI goodwill
(5,605
)
 
—

 
(5,605
)
Effect of changes in foreign currencies and other
46

 
29

 
75

Goodwill, net, at January 31, 2013
$
83,992

 
$
65,995

 
$
149,987

For the Year Ended at January 31, 2014
 
 
 
 
 
Goodwill, gross, at January 31, 2013
$
89,597

 
$
222,450

 
$
312,047

Accumulated impairment losses at January 31, 2013
(5,605
)
 
(156,455
)
 
(162,060
)
Goodwill, net, at January 31, 2013
83,992

 
65,995

 
149,987

Effect of changes in foreign currencies and other
201

 
158

 
359

Goodwill, net, at January 31, 2014
$
84,193

 
$
66,153

 
$
150,346

Balance at January 31, 2014
 
 
 
 
 
Goodwill, gross, at January 31, 2014
$
89,798

 
$
222,608

 
$
312,406

Accumulated impairment losses at January 31, 2014
(5,605
)
 
(156,455
)
 
(162,060
)
Goodwill, net, at January 31, 2014
$
84,193

 
$
66,153

 
$
150,346

(1)
The goodwill associated with Comverse MI, previously included in Comverse Other, was impaired during the fiscal year ended January 31, 2013.
(2)
The goodwill associated with Netcentrex, previously included in Comverse Other, was impaired during the fiscal year ended January 31, 2009 and prior fiscal years.
The Company tests goodwill for impairment annually as of November 1 or more frequently if events or circumstances indicate the potential for an impairment exists. Under the Company's current segment structure, the BSS and Digital Services segments have been evaluated and it has been determined that for each segment the fair value significantly exceeds the book value.
During the fiscal year ended January 31, 2013, Comverse MI, previously included in Comverse Other, experienced intensified competition, price erosion, and significant decline in capacity upgrades from existing customers, resulting in an impairment charge of approximately $5.6 million during the fiscal year ended January 31, 2013.
The Company used the adjusted net asset value method to determine the fair value of Comverse MI. Within this method, the Company estimated the amount a market participant would be willing to pay for each of the individual assets of the Comverse MI, net of liabilities. The Company's estimate was based on a number of subjective factors, including: (i) the realizable value resulting from the sale of accounts receivables and inventory, and fixed assets, (ii) the magnitude and timing of future revenue streams associated with Comverse MI's technology and trademarks, and (iii) an estimated discount rate with which to calculate the net present value of forecasted cash flows.

F-26
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




7.
INTANGIBLE ASSETS, NET
Intangible assets, net are as follows:
 
 
 
 
January 31,
 
 
Useful Life
 
2014
 
2013
 
 
 
 
(In thousands)
Gross carrying amount:
 
 
 
 
 
 
Acquired technology
 
5 to 7 years
 
$
98,000

 
$
98,000

Customer relationships
 
6 to 10 years
 
36,033

 
35,831

Trade names
 
3 to 10 years
 
3,400

 
3,400

Total Intangible Assets
 
 
 
137,433

 
137,231

Accumulated amortization:
 
 
 
 
 
 
Acquired technology
 
 
 
98,000

 
98,000

Customer relationships
 
 
 
30,880

 
27,922

Trade names
 
 
 
3,400

 
3,400

 
 
 
 
132,280

 
129,322

Total
 
 
 
$
5,153

 
$
7,909

Acquired intangible assets, net relate to the BSS segment as of January 31, 2014 and 2013.
Amortization of intangible assets was $2.8 million, $14.1 million and $17.3 million for the fiscal years ended January 31, 2014, 2013 and 2012, respectively. In connection with its testing of goodwill for impairment, the Company also tested long-lived assets, including finite-lived intangible assets. The Company did not record an impairment charge related to finite-lived intangible assets for the fiscal years ended January 31, 2014, 2013 and 2012.
Estimated future amortization expense on finite-lived acquisition-related assets for each of the succeeding fiscal years is as follows:
Fiscal Years Ending January 31,
 
(In thousands)
2015
 
$
2,771

2016
 
2,382

 
 
$
5,153

8.
OTHER ASSETS
Other assets consisted of the following:
 
 
January 31
 
 
2014
 
2013
 
 
(In thousands)
Severance pay fund (1)
 
$
33,482

 
$
36,273

Deposits
 
2,956

 
1,671

Other (2)
 
4,148

 
2,031

 
 
$
40,586

 
$
39,975

(1)
Represents deposits into insurance policies to fund severance liability of the Company's Israeli employees (see Note 14, Other Long-Term Liabilities).
(2)
Includes a $1.2 million and $1.1 million cost-method investment in a subsidiary of a significant customer as of January 31, 2014 and 2013, respectively.

F-27
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




9.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
 
 
 
January 31,
 
 
2014
 
2013
 
 
(In thousands)
Accrued compensation and benefits
 
$
51,150

 
$
56,924

Accounts payable
 
42,273

 
46,839

Accrued legal, audit and professional fees
 
2,120

 
2,860

Accrued taxes-other than income taxes
 
23,357

 
30,840

Accrued commissions
 
10,567

 
13,242

Accrued outside services-contractors
 
19,758

 
17,110

Accrued workforce reduction and restructuring
 
4,345

 
5,639

Accrued travel and entertainment
 
2,258

 
3,138

Other accrued expenses (1)
 
12,578

 
9,019

 
 
$
168,406

 
$
185,611

 
(1)
Includes liabilities related to the Company’s 401(k) Plans.
The Company maintains a 401(k) plan for its full-time employees. These plans allow eligible employees to elect to contribute up to 60% of their annual compensation, subject to the prescribed maximum amount. The Company matches employee contributions at a rate of 50%, limited to a maximum annual matched contribution of $2,000 per employee. Employee contributions are always fully vested. The Company’s matching contributions for each year vest on the last day of the calendar year providing the employee remains employed with the Company on that day. The Company’s matching contributions to the 401(k) plan amounted to $0.9 million for each of the fiscal years ended January 31, 2014, 2013 and 2012, respectively.
10.
RESTRUCTURING
The Company reviews its business, manages costs and aligns resources with market demand and in conjunction with various acquisitions. As a result, the Company has taken several actions to improve its cash position, reduce fixed costs, eliminate redundancies, strengthen operational focus and better position itself to respond to market pressures or unfavorable economic conditions. Restructuring expenses are recorded within Other operating expenses in the consolidated and combined statements of operations.
Fourth Quarter 2012 Initiatives
During the fourth quarter of fiscal year ended January 31, 2013, following the Share Distribution, the Company commenced certain initiatives to restructure its operations and reorganize its activities and go-to-market strategy, including a plan to restructure the operations of the Company with a view towards aligning operating costs and expenses with anticipated revenue and the new go-to-market strategy. In relation to this restructuring plan, the Company recorded severance-related costs of $7.1 million and facilities-related costs of $5.3 million for the fiscal year ended January 31, 2014. During the fiscal year ended January 31, 2014, the Company paid severance and facilities-related costs of $8.1 million, $1.6 million, respectively. The severance and facilities-related costs accrued under the plan are expected to be paid by April, 2014 and October, 2019, respectively.

F-28
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




Third Quarter 2010 Restructuring Initiatives and Business Transformation
During the fiscal year ended January 31, 2011, the Company commenced certain initiatives to improve its cash position, including a plan to restructure its operations with a view towards aligning operating costs and expenses with anticipated revenue, reducing its annualized operating costs. During the fiscal year ended January 31, 2012, the Company implemented a second phase of measures (the “Phase II Business Transformation”) that focuses on process reengineering to maximize business performance, productivity, and operational efficiency. As part of the Phase II Business Transformation, the Company restructured its operations into new business units that are designed to improve operational efficiency and business performance. One of the primary purposes of the Phase II Business Transformation is to solidify the Company’s leadership in BSS and leverage the growth in mobile data usage, while maintaining its leading market position in Digital Services and implementing further cost savings through operational efficiencies and strategic focus. The remaining facilities-related costs accrued under the plan are expected to be paid by May, 2017.
Netcentrex 2010 Initiative
During the fiscal year ended January 31, 2012, management, as part of initiatives to improve focus on the Company’s core business and to maintain its ability to face intense competitive pressures in its markets, approved the first phase of a restructuring plan to eliminate staff positions primarily located in France. During the fiscal year ended January 31, 2013, the Company began the second phase of its Netcentrex restructuring plan. The remaining severance and facilities-related costs accrued under the plan are expected to be paid by January, 2015.
Pre-Second Quarter 2010 Initiatives
During prior fiscal years, management implemented a number of restructuring programs. These programs had various objectives, including changes to organizational structure and product offerings, to better align its cost structure with the business environment and to improve the efficiency of its operations through reductions in workforce, restructuring of operations, abandoning and closing certain facilities, innovations to enhance the quality of its product offerings to better meet its customers’ needs and improve delivery and service capabilities.
The following table represent a roll forward of the workforce reduction and restructuring activities noted above:
 
2012 Initiative
 
Third Quarter 2010 Initiative (1)
 
Netcentrex 2010 Initiative
 
Pre-Second Quarter 2010 Initiative
 
 
 
Severance Related
 
Facilities Related
 
Severance Related
 
Facilities Related
 
Severance Related
 
Facilities Related
 
Severance Related
 
Facilities Related
 
Total
 
(In thousands)
January 31, 2011
$
—

 
$
—

 
$
2,462

 
$
86

 
$
2,910

 
$
—

 
$
233

 
$
123

 
$
5,814

Expenses
—

 
—

 
12,611

 
211

 
7,621

 
52

 
290

 
95

 
20,880

Change in assumptions
—

 
—

 
(140
)
 
—

 
(12
)
 
—

 
(2
)
 
2

 
(152
)
Translation adjustments and other
—

 
—

 
—

 
—

 
(7
)
 
—

 
—

 
—

 
(7
)
Paid or utilized
—

 
—

 
(12,447
)
 
(289
)
 
(9,334
)
 
(52
)
 
(521
)
 
(220
)
 
(22,863
)
January 31, 2012
$
—

 
$
—

 
$
2,486

 
$
8

 
$
1,178

 
$
—

 
$
—

 
$
—

 
$
3,672

Expenses
3,718

 
835

 
525

 
425

 
13

 
897

 
—

 
—

 
6,413

Change in assumptions
—

 
—

 
(128
)
 
(8
)
 
(372
)
 
—

 
—

 
—

 
(508
)
Translation adjustments and other
(2
)
 
66

 
(2
)
 
—

 
—

 
—

 
—

 
—

 
62

Paid or utilized
(3
)
 
(16
)
 
(2,881
)
 
(34
)
 
(607
)
 
(459
)
 
—

 
—

 
(4,000
)
January 31, 2013
$
3,713

 
$
885

 
$
—

 
$
391

 
$
212

 
$
438

 
$
—

 
$
—

 
$
5,639

Expenses
7,086

 
5,259

 
—

 
9

 
(126
)
 
1

 
—

 
—

 
12,229

Change in assumptions
(1,702
)
 
171

 
—

 
179

 
—

 
(94
)
 
—

 
—

 
(1,446
)
Translation adjustments and other
62

 
997

 
—

 
—

 
(5
)
 
(8
)
 
—

 
—

 
1,046

Paid or utilized
(8,097
)
 
(1,584
)
 
—

 
(189
)
 
(31
)
 
(322
)
 
—

 
—

 
(10,223
)
January 31, 2014
$
1,062

 
$
5,728

 
$
—

 
$
390

 
$
50

 
$
15

 
$
—

 
$
—

 
$
7,245

(1)
Includes expenses attributable to the Phase II Business Transformation.

F-29
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




11.
DEBT
There were no outstanding debt amounts as of January 31, 2014 or 2013.
Comverse Ltd. Lines of Credit
As of January 31, 2014 and 2013, Comverse Ltd., the Company’s wholly-owned Israeli subsidiary, had a $20.0 million line of credit with a bank to be used for various performance guarantees to customers and vendors, letters of credit and foreign currency transactions in the ordinary course of business. This line of credit is not available for borrowings. The line of credit bears no interest and is subject to renewal on an annual basis. Comverse Ltd. is required to maintain cash balances with the bank of no less than the capacity under the line of credit at all times regardless of amounts utilized under the line of credit. As of January 31, 2014 and 2013, Comverse Ltd. had utilized $20.0 million and $17.2 million, respectively, of capacity under the line of credit for guarantees and foreign currency transactions. In February 2014, Comverse Ltd. increased the line of credit from $20.0 million to $25.0 million with a corresponding increase in the cash balances Comverse Ltd. was required to maintain with the bank to $25.0 million.
 As of January 31, 2014 and 2013, Comverse Ltd. had an additional line of credit with a bank for $8.0 million, to be used for borrowings, various performance guarantees to customers and vendors, letters of credit and foreign currency transactions in the ordinary course of business. The line of credit bears no interest other than on borrowings thereunder and is subject to renewal on an annual basis. Borrowings under the line of credit bear interest at an annual rate of London Interbank Offered Rate (“LIBOR”) plus a variable margin determined based on the bank’s underlying cost of capital. Comverse Ltd. is required to maintain cash balances with the bank of no less than the capacity under the line of credit at all times regardless of amounts borrowed or utilized under the line of credit. As of January 31, 2014 and 2013, Comverse Ltd. had no outstanding borrowings under the line of credit. As of each of January 31, 2014 and 2013, Comverse Ltd. had utilized $8.0 million of capacity under the line of credit for guarantees and foreign currency transactions. In February 2014, Comverse Ltd. increased the additional line of credit from $8.0 million to $10.0 million with a corresponding increase in the cash balances Comverse Ltd. was required to maintain with the bank to $10.0 million.
Other than Comverse Ltd.’s requirement to maintain cash balances with the banks as discussed above, the lines of credit have no financial covenants. These cash balances required to be maintained with the banks were classified as “Restricted cash and bank time deposits” and “Long-term restricted cash” included within the consolidated balance sheets as of January 31, 2014 and 2013.
Note Payable to CTI
On January 11, 2011, the Company entered into a promissory note to borrow up to $10.0 million from CTI, with the note scheduled to mature on January 11, 2016. Borrowings could be prepaid by the Company without penalty. The contractual interest rate applicable to borrowings under this promissory note was LIBOR plus 4.0%. The interest expense was $0.5 million and $0.4 million for the fiscal years ended January 31, 2013 and 2012, respectively. The note payable balance to CTI of $9.4 million as of October 31, 2012 was settled through a capital contribution to the Company's equity by CTI concurrently with the Share Distribution.
Loan Agreement with CTI
On May 9, 2012, the Company entered into a revolving loan agreement (the “Loan Agreement”) with CTI, pursuant to which CTI extended the Company a $25.0 million revolving credit facility. Borrowings under the Loan Agreement were used to fund the Company’s operating expenses and working capital needs. The borrowings of $9.0 million under the loan agreement with CTI were settled through a capital contribution to the Company's equity by CTI concurrently with the Share Distribution on October 31, 2012, at which time the Loan Agreement was terminated. The interest expense was $0.1 million for the fiscal year ended January 31, 2013.
Borrowings under the Loan Agreement bore interest at the one-month LIBOR plus 4.0%. The Loan Agreement provided for the mandatory prepayment of the principal and interest outstanding under the Loan Agreement with all cash swept from the Company’s bank accounts from time to time in accordance with the Company’s cash management operations with CTI.
The Company’s obligations under the Loan Agreement were unsecured. The Loan Agreement did not contain any restrictive covenants but did contain customary events of default.

F-30
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




12.
DERIVATIVES AND FINANCIAL INSTRUMENTS
The Company entered into derivative arrangements to manage a variety of risk exposures during the fiscal years ended January 31, 2014, 2013 and 2012, including foreign currency risk related to forecasted foreign currency denominated payroll costs. The Company assesses the counterparty credit risk for each party prior to entering into its derivative financial instruments and in valuing the derivative instruments for the periods presented.
Forward Contracts
During the fiscal years ended January 31, 2014, 2013 and 2012, the Company entered into a series of short-term foreign currency forward contracts to limit the variability in exchange rates between the U.S. dollar (the “USD”) and the new Israeli shekel (“NIS”) to hedge probable cash flow exposure from expected future payroll expense. The transactions qualified for cash flow hedge accounting under the FASB’s guidance and there was no hedge ineffectiveness. Accordingly, the Company recorded all changes in fair value of the forward contracts as part of other comprehensive income (loss) in the consolidated and combined statement of comprehensive loss. Such amounts are reclassified to the consolidated and combined statements of operations when the effects of the item being hedged are recognized. The Company’s derivatives outstanding as of January 31, 2014 are short-term in nature and are due to contractually settle within the next twelve months.
Embedded Derivative
The Company has entered into a lease agreement whereby the lease payments are indexed to a non-functional currency exchange rate subject to a floor. The fair value of this embedded derivative is measured at fair value and adjusted each reporting period through the statement of operations.
The following tables summarize the Company’s derivative positions and their respective fair values:
 
 
January 31, 2014
Type of Derivative
 
Notional
Amount
 
Balance Sheet Classification
 
Fair Value
 
 
(In thousands)
Assets
 
 
 
 
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
Short-term foreign currency forward
 
$
25,607

 
Prepaid expenses and other current assets
 
$
58

Total assets
 
 
 
 
 
$
58

Liabilities
 
 
 
 
 
 
Embedded derivative
 
 
 
 
 
 
Long-term
 
6,543

 
Other long-term liabilities
 
$
719

Total liabilities
 
 
 
 
 
$
719

 
 

 
 
 
 
 
 
 
January 31, 2013
Type of Derivative
 
Notional
Amount
 
Balance Sheet Classification
 
Fair Value
 
 
(In thousands)
Assets
 
 
 
 
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
Short-term foreign currency forward
 
$
21,557

 
Prepaid expenses and other current assets
 
$
475

Total assets
 
 
 
 
 
$
475

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Embedded derivative
 
 
 
 
 
 
Long-term
 
7,138

 
Other long-term liabilities
 
$
429

Total liabilities
 
 
 
 
 
$
429


F-31
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




The following tables summarize the Company’s classification of gains and losses from continuing operations on derivative instruments:
 
 
January 31, 2014
 
 
Gain (Loss)
Type of Derivative
 
Recognized in 
Other Comprehensive
Income (Loss)
 
Reclassified from
Accumulated 
Other Comprehensive
Income into 
Statement
of Operations (1)
 
Recognized in 
Other Income (Expense), Net
 
 
(In thousands)
Derivatives designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
$
768

 
$
1,185

 
$
—

Total
 
$
768

 
$
1,185

 
$
—

 
 
January 31, 2013
 
 
Gain (Loss)
Type of Derivative
 
Recognized in 
Other Comprehensive
Income (Loss)
 
Reclassified from
Accumulated 
Other Comprehensive
Income into 
Statement
of Operations (1)
 
Recognized in 
Other Income (Expense), Net
 
 
(In thousands)
Derivatives designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
$
98

 
$
(141
)
 
$
—

Total
 
$
98

 
$
(141
)
 
$
—


 
 
January 31, 2012
 
 
Gain (Loss)
Type of Derivative
 
Recognized in 
Other Comprehensive
Income (Loss)
 
Reclassified from
Accumulated 
Other Comprehensive
Income into 
Statement
of Operations (1)
 
Recognized in 
Other Income (Expense), Net
 
 
(In thousands)
Derivatives designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward
 
$
1,741

 
$
2,334

 
$
—

Total
 
$
1,741

 
$
2,334

 
$
—

 
 
 
 
 
 
 
(1)
Amounts reclassified from accumulated other comprehensive income (“OCI”) into the statement of operations are classified as operating expenses.
There were no gains or losses from ineffectiveness of these hedges recorded for the fiscal years ended January 31, 2014, 2013 and 2012.

F-32
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




The components of OCI related to cash flow hedges are as follows:
 
 
Fiscal Years Ended January 31,
 
 
2014
 
2013
 
2012
 
 
(In thousands)
Accumulated OCI related to cash flow hedges, beginning of the year
 
$
475

 
$
234

 
$
853

Unrealized gains (losses) on cash flow hedges
 
768

 
(48
)
 
1,758

Reclassification adjustment
 
(1,185
)
 
159

 
(2,388
)
Changes in accumulated OCI on cash flow hedges, before tax(1)
 
(417
)
 
111

 
(630
)
Other comprehensive (loss) income attributable to noncontrolling interest
 
—

 
—

 
11

OCI related to discontinued operations
 
—

 
130

 
—

Changes in accumulated OCI on cash flow hedges
 
(417
)
 
241

 
(619
)
Accumulated OCI related to cash flow hedges, end of the year
 
$
58

 
$
475

 
$
234

(1)
There was no tax impact on OCI related to cash flow hedges for the fiscal years ended January 31, 2014, 2013 and 2012.
The amounts reclassified out of accumulated other comprehensive income (loss) into the consolidated and combined statements of operations for continuing operations, with presentation location, were as follows:
 
Fiscal Years Ended January 31,
 
2014
 
2013
 
2012
 
(In thousands)
Cost of revenue
$
(602
)
 
$
55

 
$
(1,002
)
Research and development, net
(186
)
 
42

 
(631
)
Selling, general and administrative
(397
)
 
44

 
(701
)
   Total
$
(1,185
)
 
$
141

 
$
(2,334
)
13.
FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The fair value of financial instruments is estimated by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Commercial paper. The Company uses quoted prices for similar assets and liabilities.
Money Market Funds. The Company values these assets using quoted market prices for such funds.
Derivative assets. The fair value of derivative instruments is based on quotes or data received from counterparties and third party financial institutions. These quotes are reviewed for reasonableness by discounting the future estimated cash flows under the contracts, considering the terms and maturities of the contracts and markets rates for similar contracts using readily observable market prices thereof.
The following tables present financial instruments according to the fair value hierarchy as defined by the FASB’s guidance:

F-33
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




 Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis as of January 31, 2014
  
January 31, 2014
 
Quoted Prices
to Active
Markets for
Identical
Instruments
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
Money market funds (1)
$
34,398

 
$
—

 
$
—

 
$
34,398

Derivative assets
—

 
58

 
—

 
58

 
$
34,398

 
$
58

 
$
—

 
$
34,456

Financial Liabilities:
 
 
 
 
 
 
 
Embedded Derivative
$
—

 
$
719

 
$
—

 
$
719

 
$
—

 
$
719

 
$
—

 
$
719

 
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis as of January 31, 2013
 
January 31, 2013
 
Quoted Prices
to Active
Markets for
Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value
 
(In thousands)
Financial Assets:
 
 
 
 
 
 
 
Commercial paper (1)
$
—

 
$
9,391

 
$
—

 
$
9,391

Money market funds (1)
38,503

 
—

 
—

 
38,503

Derivative assets
—

 
475

 
—

 
475

 
$
38,503

 
$
9,866

 
$
—

 
$
48,369

Financial Liabilities:
 
 
 
 
 
 
 
Embedded Derivative
$
—

 
$
429

 
$
—

 
$
429

 
$
—

 
$
429

 
$
—

 
$
429

 
(1)
As of January 31, 2014, $34.4 million of money market funds were classified in “Cash and cash equivalents” within the consolidated balance sheet. As of January 31, 2013, $9.4 million of commercial paper and $38.5 million of money market funds were classified in “Cash and cash equivalents” within the consolidated balance sheet.
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, the Company also measures certain assets and liabilities at fair value on a nonrecurring basis. The Company measures non-financial assets, classified within Level 3 of the fair value hierarchy, including goodwill, intangible assets and property and equipment, at fair value when there is an indication of impairment. These assets are recorded at fair value only when an impairment expense is recognized. The Company has elected not to apply the fair value option for non-financial assets and non-financial liabilities. For further details regarding impairment reviews, see Note 1, Organization, Business and Summary of Significant Accounting Policies.
During the fiscal year ended January 31, 2013, the Company recorded a goodwill impairment charge of approximately $5.6 million. The Company used the adjusted net asset value method to determine the fair value of Comverse MI, which previously was a reporting unit within Comverse Other, including unobservable inputs classified as Level 3 within the fair value hierarchy. Within this method, the Company estimated the amount a market participant would be willing to pay for each of the individual assets of Comverse MI, net of liabilities (see Note 6, Goodwill).
The carrying amounts of cash and cash equivalents, restricted cash and bank time deposits, accounts receivable and accounts payable are reasonable estimates of their fair value.

F-34
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




14.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities consisted of the following:
 
January 31,
 
2014
 
2013
 
(In thousands)
Liability for severance pay
$
44,793

 
$
48,421

Tax contingencies
90,345

 
114,205

Other long-term liabilities
12,804

 
6,250

Total
$
147,942

 
$
168,876

Under Israeli law, the Company is obligated to make severance payments under certain circumstances to employees of its Israeli subsidiaries on the basis of each individual’s current salary and length of employment. The Company’s liability for severance pay is calculated pursuant to Israel’s Severance Pay Law based on the most recent monthly salary of the employee multiplied by the number of years of employment, as of the balance sheet date. The liability for severance pay is recognized as compensation benefits in the consolidated and combined statements of operations. Employees are entitled to one month’s salary for each year of employment or a portion thereof.  The Company records the obligation as if it was payable at each balance sheet date (“shut-down method”).  A portion of such severance liability is funded by monthly deposits into insurance policies, which are restricted to only be used to satisfy such severance payments. Any change in the fair value of the asset is recognized as an adjustment to compensation expense in the consolidated and combined statements of operations. The asset and liability are recognized gross and not offset on the consolidated balance sheet. Upon involuntary termination, employees will receive the balance from deposited funds from the insurance policies with the remaining balance paid by the Company. For voluntarily termination the employees are entitled, based on Company's policy, to the balance in the deposited funds. Any remaining net liability balance is reversed as compensation benefits in the consolidated and combined statements of operations.
 For employees in Israel hired after January 2011, the Company makes regular deposits with certain insurance companies for accounts controlled by each applicable employee in order to secure the employee's rights upon termination. The Company is relieved from any severance pay liability with respect to deposits made on behalf of each employee. As such, the severance plan is only defined by the monthly contributions made by the Company, the liability accrued in respect of these employees and the amounts funded are not reflected in the Company's balance sheets. The portion of liability not funded is included in Other liabilities in the consolidated balance sheets.
A portion of such severance liability is funded by monthly deposits into insurance policies, which are restricted to only be used to satisfy such severance payments. The amount of deposits is classified in “Other assets” within the consolidated balance sheets as severance pay fund in the amounts of $33.5 million and $36.3 million as of January 31, 2014 and 2013, respectively.
Severance pay expenses pursuant to Israel’s Severance Pay Law were as follows:
 
 
Fiscal Years Ended January 31,
 
 
2014
 
2013
 
2012
 
 
(In thousands)
Increase due to passage of time
 
$
4,794

 
$
5,670

 
$
6,828

Increase due to salary increase
 
1,370

 
1,617

 
1,550

Reversal due to voluntary termination of employee
 
(1,046
)
 
(636
)
 
(1,419
)
Gain from increase in fund value
 
(1,410
)
 
(1,140
)
 
(656
)
 Total operating expense due to Israeli Severance Law
 
$
3,708

 
$
5,511

 
$
6,303

15.
STOCK-BASED COMPENSATION
Comverse, Inc. 2012 Stock Incentive Compensation Plan
In October 2012, in connection with the Share Distribution the Company adopted the Comverse, Inc. 2012 Stock Incentive Compensation Plan (the "2012 Incentive Plan"). The following is a summary of the material terms of the 2012 Incentive Plan.
The 2012 Incentive Plan provides for the issuance of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock and other stock-based awards (referred to collectively as the "Awards") based on shares of

F-35
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




the Company's common stock (referred to as "Shares"). The Company's employees, non-employee directors and consultants as well as employees and consultants of its subsidiaries and affiliates are eligible to receive Awards.
A total of 2.5 million Shares are reserved for issuance under future Awards to be granted under the 2012 Incentive Plan following the effective date of the plan (referred to as the "Future Awards"). As of January 31, 2014, an aggregate of 1.8 million Future Awards are available for grant under the plan.
The 2012 Incentive Plan is scheduled to terminate in October 2022. Options will be designated as either nonqualified stock options or incentive stock options. An option granted as an incentive stock option will, to the extent it fails to qualify as an incentive stock option, be treated as a nonqualified option. The exercise price of an option, either incentive stock option or nonqualified stock options, may not be less than the fair market value of underlying shares on the date of grant, except for individuals who hold a 10% or more interest in the Company, for whom the exercise price of any Future Award may not be less than 110% of the share price. The term of each option may not exceed ten years (or, in the case of an incentive stock option granted to a 10% shareholder, five years). The maximum number of shares with respect to which any options may be granted to any grantee in any consecutive twelve (12) month period shall be 300,000 shares. In addition, the maximum number of shares with respect to which any stock appreciation rights may be granted to any grantee in any consecutive twelve (12) month period shall be 300,000 shares. The maximum amount of compensation under an award that is intended to constitute “qualified performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code (“Performance-Based Compensation Awards”) (other than options and stock appreciation rights) granted to any grantee in any consecutive twelve (12) month period shall be 150,000 shares and the maximum amount of Performance-Based Compensation Awards granted to any grantee in any consecutive twelve (12) month period shall be $10,000,000 if such Performance-Based Compensation Awards are denominated in cash rather than shares.
Replacement of CTI's Equity-Based Compensation Awards
Pursuant to the terms of the Share Distribution, certain awards that were previously granted under CTI's stock incentive plan to the Company's employees and consultants have been replaced by awards that relate to the Company's common stock and have been assumed by the 2012 Incentive Plan (referred to as the "Assumed CTI Awards"). A total of 5.0 million Shares were reserved for issuance under the Assumed CTI Awards. Such reserved Shares may only be issued pursuant to the Assumed CTI Awards and may not be issued pursuant to any Future Awards. In connection with the Share Distribution, the Company issued 857,280 restricted stock units and 495,894 options to purchase shares of the Company's common stock to replace CTI Awards previously granted to the Company's employees. The treatment of the Assumed CTI Awards held by the Company's employees and consultants is described below.
Stock Option Awards
CTI options held by the Company's employees were replaced on November 1, 2012 with options for shares of the Company's common stock as described below, based on whether the CTI options had an exercise price that was (a) less than $10.52 per share (referred to as the "Group A options") or (b) equal to or greater than $10.52 per share (referred to as the "Group B options").
The exercise price of the Group A options was adjusted such that the exercise price equaled one hundred percent (100%) of the published closing trading price of a share of the Company's common stock on the NASDAQ Stock Exchange on November 1, 2012. The number of shares of the Company's common stock subject to the Group A options was adjusted such that for each award, the aggregate Black-Scholes value of the Group A options immediately after the Share Distribution date was equal to the aggregate Black-Scholes value of the Group A options immediately before the Share Distribution date. The adjusted Group A options have a new term of ten years beginning on November 1, 2012. Any fractional shares resulting from the adjustment were rounded down to the nearest whole share. All other terms of the Group A options remained the same, including continued vesting pursuant to the current terms of the awards.
The exercise price of the Group B options was adjusted such that the exercise price equaled two hundred percent (200%) of the published closing trading price of a share of the Company's common stock on the NASDAQ Stock Exchange on November 1, 2012. The number of shares of the Company's common stock subject to the Group B options was adjusted such that for each award the aggregate Black-Scholes value of the Group B Options immediately after the Share Distribution date was equal to the aggregate Black-Scholes value of the Group B options immediately before the Share Distribution date. The adjusted Group B options have a remaining term that is the same as the existing option term. Any fractional shares resulting from the adjustment were rounded down to the nearest whole share. All other terms of the Group B options remain the same, including continued vesting pursuant to the current terms of the awards.
CTI options that were “in the money,” (i.e., where the exercise price is less than the trading price of the CTI stock) were replaced in a manner that preserved the aggregate in-the-money value and the ratio of exercise price to fair-market value of

F-36
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




such options. All other terms of the in the money options remain the same, including continued vesting, and time to expiration, pursuant to the current terms of the awards.
The replacement of CTI's equity-based compensation awards was considered a modification of an award. As a result, the Company compared the fair value of the awards immediately prior to the Share Distribution to the fair value of the awards immediately after the Share Distribution to measure incremental compensation cost. The modification resulted in an increase in the fair value of the awards. The amount of non-cash compensation expense was negligible.
The following table presents CTI options held by the Company's employees and officers as of the Share Distribution date and the number of replacement options granted under the 2012 Incentive Plan:
Option
CTI's options
 
Replacement options granted under 2012 Plan
Group A options
374,800

 
77,526

Group B options
1,716,978

 
70,881

In the money options
1,533,699

 
347,487

Total options
3,625,477

 
495,894

Unvested Restricted Stock Units (RSUs) and Unvested Deferred Stock Units (DSUs)
On November 1, 2012, unvested CTI RSUs and unvested CTI DSUs held by the Company's officers and employees were replaced with the Company's RSUs. Following the Share Distribution date, the number of shares of the Company's common stock underlying the replaced RSUs was equal to (1) the number of CTI common shares underlying the CTI RSUs and CTI DSUs held as of the Share Distribution date multiplied by (2) a ratio, the numerator of which was equal to the published closing trading price of a CTI common share on the NASDAQ Stock Exchange (traded the “regular way”) on the day prior to the Share Distribution date and, the denominator of which was equal to the published closing trading price of a share of the Company's common stock on the NASDAQ Stock Exchange on November 1, 2012. In lieu of issuing fractional RSUs, a cash payment equal to the value of the fractioned share was made to the holders by the Company. All other terms and conditions of the Company's RSUs remain the same, including continued vesting pursuant to the current terms of the awards.
The following table presents CTI's RSUs and DSUs held by the Company's employees and officers as of the Share Distribution date and the number of replacement RSUs granted under the 2012 Incentive Plan:
Stock units
CTI's stock units
 
Replacement restricted stock units under the 2012 Incentive
RSUs
3,200,339

 
724,807

DSUs
584,667

 
132,473

Total
3,785,006

 
857,280


F-37
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




Company Share-Based Awards
Stock-based compensation expense associated with awards made by the Company, as well as historically allocated stock-based compensation expense from CTI, included in the Company’s consolidated and combined statements of operations are as follows:
 
 
Fiscal Years Ended January 31,
 
 
2014
 
2013
 
2012
 
 
(In thousands)
Stock options:
 
 
 
 
 
 
Product costs
 
$
—

 
$
—

 
$
7

Service costs
 
142

 
31

 
49

Research and development, net
 
86

 
4

 
30

Selling, general and administrative
 
1,430

 
625

 
216

 
 
1,658

 
660

 
302

Restricted/Deferred stock awards:
 
 
 
 
 
 
Service costs
 
2,749

 
1,620

 
469

Research and development, net
 
925

 
939

 
322

Selling, general and administrative
 
4,876

 
4,298

 
2,567


 
8,550

 
6,857

 
3,358

Total
 
$
10,208

 
$
7,517

 
$
3,660

Stock-based compensation expense associated with awards granted to Starhome's employees is included in discontinued operations and therefore not presented in the table above. For the fiscal years ended January 31, 2013 and 2012, such stock-based compensation expense was $0.5 million and $0.4 million, respectively.
Restricted Awards and Stock Options
The Company grants restricted stock unit awards and deferred stock unit awards subject to vesting provisions (collectively, “Restricted Awards”) to certain key employees and directors. For the fiscal years ended January 31, 2014 and 2013, the Company granted Restricted Awards valued at $9.8 million and $0.8 million, respectively, based on the fair market value of the Company’s common stock on the date of grant. The Company grants stock options to certain key employees. For the fiscal years ended January 31, 2014 and 2013, the Company granted stock options valued at $3.1 million and $0.4 million, respectively, based on the grant date fair value.
Included in the grants of restricted stock awards are certain awards that vest subject to certain performance-based criteria. During the fiscal year ended January 31, 2014, performance-based awards of restricted stock units for the issuance of 116,279 shares of common stock, with a fair value of $3.4 million, were granted to certain executive officers and employees of the Company. These grants will vest upon achievement of prescribed performance milestones and service requirements of two years for vesting. During the fiscal year ended January 31, 2014, 34,884 shares have been forfeited due to prescribed performance milestones not being achieved. As of January 31, 2014, the remainder of the performance shares have milestone that have been or are probable of being achieved.
As of January 31, 2014, 754,349 stock options to purchase the Company’s common stock and 656,141 Restricted Awards were outstanding, of which 81,395 shares were performance-based awards. There were 1,811,375 shares available for future grant under the 2012 Incentive Plan as of January 31, 2014.

F-38
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




The following table presents the combined activity of the Company's stock options:
 
 
Outstanding Options
 
 
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining Contractual Term ( in years)
 
Aggregate Intrinsic Value (in millions)
Balance, January 31, 2013
 
516.534

 
$
31.33

 
 
 
 
Options granted
 
344,807

 
29.23

 
 
 
 
Options expired (1)
 
(24,018
)
 
47.79

 
 
 
 
Options cancelled (1)
 
(37,818
)
 
42.68

 
 
 
 
Options forfeited
 
(3,906
)
 
29.00

 
 
 
 
Options exercised
 
(41,250
)
 
26.87

 
 
 
 
Balance, January 31, 2014 (2)
 
754,349

 
$
29.53

 
8.44
 
$
5.7

Options exercisable as of January 31, 2014 (3)
 
181,465

 
$
33.16

 
6.59
 
$
1.3

Options exercisable as of January 31, 2014 and expected to vest thereafter (3)
 
711,342

 
$
29.59

 
8.40
 
$
5.3

(1)
Awards issued under the 5.0 million shares reserved for issuance under the Assumed CTI Awards may not be reissued pursuant to any future awards. During the fiscal years ended January 31, 2013, the number of stock options cancelled under the Assumed CTI Awards was 4,947. During the fiscal years ended January 31, 2014, the number of stock options expired and cancelled under the Assumed CTI Awards were 24,018 and 37,818, respectively.
(2)
The outstanding stock options as of January 31, 2014 include 572,884 unvested stock options with a weighted-average modified/grant date fair value of $8.99 per share, an expected term of 4 years and a total fair value of $5.2 million. The unrecognized compensation expense, net of estimated forfeitures, related to the remaining unvested stock options was $3.8 million which is expected to be recognized over a weighted-average period of 2.05 years. The cash received from the exercise of stock options was $1.1 million during the year ended January 31, 2014.
(3)
During the fiscal year ended January 31, 2014, 115,997 shares of stock options vested with a total fair value of $1.1 million. No options vested during the three months ended January 31, 2013 following the Share Distribution.
The following table summarizes information about the Company’s stock options:
 
 
January 31, 2014
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise  Prices
 
Options
Outstanding
 
Weighted
Average
Remaining
Contractual
Life
 
Weighted
Average
Exercise
Price
 
Options
Exercisable
 
Weighted
Average
Remaining
Contractual
Life
 
Weighted
Average
Exercise
Price
 Below $27.00
 
67,984

 
8.48
 
$
23.78

 
22,662

 
8.48
 
$
23.78

 $27.00 - $28.99
 
279,996

 
8.45
 
$
27.94

 
93,335

 
8.45
 
$
27.94

 $29.00 - $29.08
 
353,051

 
9.01
 
$
29.01

 
32,224

 
5.32
 
$
29.08

 $29.09 - $38.87
 
20,074

 
9.67
 
$
32.91

 
—

 
0
 
—

 Above $38.87
 
33,244

 
1.33
 
$
58.16

 
33,244

 
1.33
 
$
58.16

Total
 
754,349

 
8.44
 
$
29.53

 
181,465

 
6.59
 
$
33.16

Fair Value Assumptions
The Company estimated the fair value of stock options on the date of grant or modification utilizing the Black-Scholes option valuation model. Assumptions for all grants and significant modifications are detailed below.

F-39
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




The fair value assumptions for stock options granted during the fiscal year ended January 31, 2014 and three months ended January 31, 2013 (subsequent to the Share Distribution), were as follows:
 
 
Fiscal Years Ended January 31, 2014
 
Three Months Ended January 31, 2013
Risk-Free Rate
 
 0.77% - 1.27%

 
0.47
%
Volatility
 
37.37% - 43.72%

 
50.10
%
Expected Term (years)
 
4

 
4

Market Value
 
$29.00 - $38.87

 
$
28.23

Weighted-average estimated fair value of options granted during the year
 
$
8.93

 
$
10.99

Grant date fair value of stock options vested (in millions)
 
$
1.1

 
$
—

Intrinsic value of all options exercised (in millions)
 
$
0.2

 
$
0.02

The Company based the risk-free interest rate on the implied yields on U.S. Treasury zero-coupon issues with an equivalent remaining term at the time of grant.
The expected term in years represents the period of time that the awards granted are expected to be outstanding based on historical experience of Comverse employees while employed by CTI prior to the Share Distribution. The assumption for dividend yield is zero because the Company has not historically paid dividends nor does it expect to do so in the foreseeable future.
The following table summarizes the activities for our unvested RSUs for the year ended January 31, 2014:
 
 
Unvested Restricted Awards
 
 
Shares
 
Weighted
Average Modified/Grant
Price
Unvested balance, January 31, 2013
 
838,560

 
$
29.03

Restricted/deferred shares granted
 
215,281

 
29.95

Restricted shares vested (1)
 
(310,304
)
 
28.98

Restricted shares forfeited(2)
 
(168,791
)
 
30.14

Performance shares granted
 
116,279

 
29.00

Performance shares forfeited
 
(34,884
)
 
29.00

    Unvested balance, January 31, 2014 (3)
 
656,141

 
$
29.35

Expected to vest after January 31, 2014 (4)
 
552,694

 
$
28.72

(1)
The total fair value of vested Restricted Awards during the fiscal years ended January 31, 2014 and 2013, was $9.0 million and $0.1 million, respectively.
(2)
Awards issued under the 5.0 million shares reserved for issuance under the Assumed CTI Awards may not be reissued pursuant to any future awards. During the fiscal years ended January 31, 2014 and 2013, the number of restricted stocks units forfeited under the Assumed CTI Awards were 158,055 and 43,589, respectively.
(3)
As of January 31, 2014, the unrecognized compensation expense, net of estimated forfeitures, related to unvested Restricted Awards was $11.9 million which is expected to be recognized over a weighted-average period of 1.53 years.
(4)
RSUs expected to vest reflect an estimated forfeiture rate.

F-40
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




16.
DISCONTINUED OPERATIONS
Starhome was a CTI subsidiary (66.5% owned as of January 31, 2012). On September 19, 2012, CTI, in order to ensure it could meet the conditions of the Verint Merger, contributed to the Company its interest in Starhome, including its rights and obligations under the Starhome Share Purchase Agreement discussed below. The Starhome Disposition was completed on October 19, 2012.
Under the terms of the Starhome Share Purchase Agreement, Starhome’s shareholders received aggregate cash proceeds of approximately $81.3 million, subject to adjustment for fees, transaction expenses and certain taxes. Of this amount, $10.5 million is held in escrow to cover potential post-closing indemnification claims, with $5.5 million being released after 18 months and the remainder released after 24 months, in each case, less any claims made on or prior to such dates. The Company received aggregate net cash consideration (including $4.9 million deposited in escrow at closing) of approximately $37.2 million, after payments that CTI agreed to make to certain other Starhome shareholders of up to $4.5 million. The escrow funds are available to satisfy certain indemnification claims under the Starhome Share Purchase Agreement to the extent that such claims exceed $1.0 million. As of January 31, 2014, such claims have not exceeded the $1.0 million threshold.
The Company and Starhome shareholders have made customary representations and warranties and covenants in the Starhome Share Purchase Agreement, including an agreement not to solicit Starhome employees or interfere with Starhome’s clients, customers, suppliers, licensor's or other business relationships for a period of four years following the closing. The Company has also agreed for a period of four years following the closing (October 19, 2012) that it will not, and will cause its affiliates not to, create, design, develop or offer for sale any product or service which directly competes with any products or services offered by Starhome, subject to certain limited exceptions. In addition, as contemplated by the Starhome Share Purchase Agreement, Starhome and the Company entered into a transition services agreement at the closing of the Starhome Disposition.
The Company did not have significant continuing involvement in Starhome's operations following the closing of the Starhome Disposition, and accordingly, the results of operations of Starhome are included in discontinued operations, less applicable income taxes, as a separate component of net loss in the Company's consolidated and combined statements of operations for the fiscal years ended January 31, 2013 and 2012.
Starhome's results of operations included in discontinued operations were as follows:
 
Fiscal Years Ended January 31,
 
2013
 
2012
 
(In thousands)
Total revenue
$
35,132

 
$
45,049

Income before income tax expense
$
4,352

 
$
8,453

Income tax expense
(410
)
 
(692
)
Income from discontinued operations, net of tax
3,942

 
7,761

Gain on sale of discontinued operations, net of tax
22,600

 
—

Total income from discontinued operations, net of tax
$
26,542

 
$
7,761

Attributable to Comverse, Inc.
25,375

 
5,187

Attributable to noncontrolling interest
1,167

 
2,574

 
$
26,542

 
$
7,761

The Company and Starhome had previously entered into transactions pursuant to which the Company performed certain production, support and maintenance services for Starhome, and these transactions continue following the completion of the Starhome Disposition. The Company does not consider these transactions to be significant. The Company recognized revenue related to transactions with Starhome of $3.0 million and $3.1 million and cost of revenue of $0.3 million and $1.4 million for the nine months ended October 31, 2012 and the fiscal year ended January 31, 2012, respectively.
Subsequent to the Starhome Distribution, the Company recognized revenues related to transactions with Starhome of $1.3 million for the fiscal year ended January 31, 2014 and recognized revenues of $1.0 million for the three months ended January 31, 2013.

F-41
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




17.
EARNINGS (LOSS) PER SHARE ATTRIBUTABLE TO COMVERSE, INC.'S STOCKHOLDERS
Basic earnings (loss) per share attributable to the Company’s stockholders for the fiscal years ended January 31, 2014, 2013 and 2012 is computed using the weighted average number of shares of common stock outstanding. For purposes of computing diluted earnings (loss) per share attributable to the Company’s stockholders, shares issuable upon exercise of stock options and deliverable in settlement of unvested RSU awards are included in the weighted average number of shares of common stock outstanding, except when the effect would be antidilutive.
The calculation of earnings (loss) per share attributable to Comverse, Inc.’s stockholders is as follows:
 
 
Fiscal Years Ended January 31,
 
 
2014
 
2013
 
2012
 
 
(In thousands, except per share data)
Numerator:
 
 
 
 
 
 
Net income (loss) from continuing operations attributable to
       Comverse, Inc.-basic and diluted
 
$
18,686

 
$
(20,294
)
 
$
(20,648
)
Net income from discontinued operations, attributable to
       Comverse, Inc.-basic and diluted
 
—

 
25,375

 
5,187

Denominator:
 
 
 
 
 
 
Basic weighted average common shares outstanding
 
22,164

 
21,924

 
21,923

Stock options
 
13

 
—

 
—

Restricted awards
 
205

 
—

 
—

Diluted weighted average common shares outstanding
 
22,382

 
21,924

 
21,923

Earnings (loss) per share
 
 
 
 
 
 
Basic
 
 
 
 
 
 
Earnings (loss) per share from continuing operations attributable to Comverse, Inc.
 
$
0.84

 
$
(0.93
)
 
$
(0.94
)
Earnings per share from discontinued operations attributable to Comverse, Inc.
 
—

 
1.16

 
0.23

Basic earnings (loss) per share
 
$
0.84

 
$
0.23

 
$
(0.71
)
Diluted
 
 
 
 
 
 
Earnings (loss) per share from continuing operations attributable to Comverse, Inc.
 
$
0.83

 
$
(0.93
)
 
$
(0.94
)
Earnings per share from discontinued operations attributable to Comverse, Inc.
 
—

 
1.16

 
0.23

Diluted earnings (loss) per share
 
$
0.83

 
$
0.23

 
$
(0.71
)
     The computation of basic and diluted loss per share for the fiscal year ended January 31, 2012 is calculated using the number of shares of the Company's common stock outstanding on October 31, 2012, following the Share Distribution. For the fiscal year ended January 31, 2012, there are no dilutive shares as there were no actual shares or share-based awards outstanding for Comverse, Inc. prior to the Share Distribution.
As a result of the Company's net loss from continuing operation in the fiscal year ended January 31, 2013, the diluted earnings per share calculation excludes 0.3 million shares of stock-based awards from the calculation because their inclusion would have been anti-dilutive.
The computation of the Company's diluted earnings per share for the fiscal year ended January 31, 2014 excludes 0.7 million shares of stock-based awards from the calculation because their inclusion would have been anti-dilutive.

F-42
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




18.
OTHER EXPENSE, NET
Other expense, net, for the fiscal years ended January 31, 2014, 2013 and 2012 is comprised of the following:
 
 
Fiscal Years Ended January 31,
 
 
2014
 
2013
 
2012
 
 
(In thousands)
Foreign currency transaction losses, net
 
$
(10,290
)
 
$
(4,961
)
 
$
(5,897
)
Other, net
 
699

 
912

 
(1,295
)
 
 
$
(9,591
)
 
$
(4,049
)
 
$
(7,192
)
19.
INCOME TAXES
The Company's operating results have historically been included in CTI's consolidated U.S. federal and state income tax returns. The Company's non-U.S. operations had primarily been conducted separate from CTI. For purposes of the Company's combined financial statements pre-Share Distribution, the provision for income taxes, taxes payable and deferred income tax balances had been recorded as if the Company had filed all tax returns on a separate return basis (“hypothetical carve-out basis”) from CTI. Post-Share Distribution, the provision for income taxes, taxes payable and deferred income tax balances are recorded in accordance with the Company's stand-alone income tax positions.
During the nine months ended October 31, 2013, the Company's income tax balances which had been previously presented on a hypothetical carve-out basis at January 31, 2013 were adjusted to reflect the Company's post-Share Distribution stand-alone income tax positions, including those related to unrecognized tax benefits, tax loss and credit carry forwards, other deferred tax assets and valuation allowances. These post-Share Distribution adjustments resulted in a $6.1 million increase in income taxes payable and a $2.6 million decrease in net deferred tax assets including valuation allowances which were offset by an $8.7 million increase in accumulated deficit.
The Company and CTI have entered into an agreement that governs their respective rights, responsibilities and obligations after the Share Distribution with respect to tax obligations, tax attributes, tax contests and other tax matters regarding income taxes, other taxes and related tax returns. The agreement provides that the Company will be responsible for all tax obligations with respect to periods before the Share Distribution. After October 31, 2013, the Company has recorded income tax obligations of CTI, in addition to those of the Company.
On September 19, 2012, CTI, in order to ensure it could meet the conditions of the Verint Merger, contributed to the Company its interest in Starhome, including its rights and obligations under the Starhome Share Purchase Agreement. The Company recorded a deferred tax asset and related valuation allowance of approximately $12.4 million at the time of the contribution. The Starhome Disposition was completed on October 19, 2012 and the deferred tax asset and related valuation allowance were reversed through income from discontinued operations, net of tax.
As part of the remediation effort for the Company's material weakness in income taxes, during the fourth quarter of fiscal 2013 the Company identified and corrected via an adjustment of income tax expense, overstatements of its accruals made in prior years for uncertain tax positions related to federal and state income tax returns for the periods from 2005 to 2012. The correction resulted in a $4.8 million reduction of its uncertain tax positions (see Note 14, Other Long-Term Liabilities) and a reduction in income tax expense as of and for the year ended January 31, 2014. The $4.8 million reduction in income tax expense was partially offset by the correction of an overstatement of the Company’s withholding tax assets related to foreign withholdings which totaled $1.2 million for the periods from 2010 to 2012.
The components of United States and foreign income (loss) from continuing operations before income taxes are as follows:
 
 
Fiscal Years Ended January 31,
 
 
2014
 
2013
 
2012
 
 
(In thousands)
United States
 
$
(53,464
)
 
$
(43,072
)
 
$
(29,077
)
Foreign
 
81,339

 
36,304

 
33,720

 Income (loss) before income taxes
 
$
27,875

 
$
(6,768
)
 
$
4,643


F-43
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




The expense (benefit) for income taxes from continuing operations consists of the following:
 
 
Fiscal Years Ended January 31,
 
 
2014
 
2013
 
2012
 
 
(In thousands)
Current income tax (benefit) expense:
 
 
 
 
 
 
U.S. Federal
 
$
(24,615
)
 
$
13,551

 
$
456

U.S. States
 
(2,742
)
 
2,369

 
(69
)
Foreign
 
19,201

 
9,330

 
22,097

Total current income tax (benefit) expense
 
$
(8,156
)
 
$
25,250

 
$
22,484

Deferred income tax (benefit) expense:
 
 
 
 
 
 
U.S. Federal, net of federal (benefit) expense of state
 
$
14,033

 
$
(11,080
)
 
$
2,668

U.S. States
 
(678
)
 
1,495

 
533

Foreign
 
3,990

 
(2,139
)
 
(394
)
Total deferred income tax expense (benefit)
 
$
17,345

 
$
(11,724
)
 
$
2,807

Total income tax expense
 
$
9,189

 
$
13,526

 
$
25,291

 
The reconciliation of the U.S. federal statutory income tax rate to the effective tax rate on income or loss before income tax expense from continuing operations is as follows:
 
 
 
Fiscal Years Ended January 31,
 
 
2014
 
2013
 
2012
 
 
(In thousands)
U.S. federal statutory income tax rate
 
35.0
%
 
35.0
 %
 
35.0
%
Income tax expense (benefit) at the U.S. statutory rate
 
$
9,749

 
$
(2,369
)
 
$
1,625

Valuation allowance, excluding state valuation allowances
 
34,693

 
(22,724
)
 
13,253

Foreign rate differential
 
(7,962
)
 
(7,680
)
 
(6,706
)
US tax effects of foreign operations
 
1,018

 
29,175

 
(16
)
Tax contingencies
 
9,934

 
9,301

 
15,059

Stock based compensation
 
287

 
980

 
9,192

Goodwill impairment
 
—

 
420

 
—

Interest on tax refunds
 
(95
)
 
(6,527
)
 
—

Non-deductible expenses
 
1,609

 
1,532

 
3,543

Change in Israeli Approved Enterprise Status
 
(43,660
)
 
—

 
—

Correction of Prior Period
 
(3,592
)
 
—

 
—

Foreign exchange
 
(2,276
)
 
(71
)
 
(505
)
Change in tax laws
 
612

 
475

 
(1,221
)
State tax provision, net
 
3,076

 
2,511

 
1,079

Withholding tax, net of credits
 
6,534

 
4,836

 
3,640

Return to provision and other adjustments
 
(738
)
 
3,667

 
(13,652
)
Total income tax expense
 
$
9,189

 
$
13,526

 
$
25,291

Effective Income Tax Rate
 
33.0
%
 
(199.9
)%
 
544.7
%
The significant differences that impact the effective tax rate relate to changes to the valuation allowance, tax credit, tax contingencies, the difference between the U.S. federal statutory rate and the rates in foreign jurisdictions, the U.S. tax effect on foreign earnings and withholding taxes.
The Company's operations in Israel have been approved as an “Approved Enterprise” pursuant to programs administered by the Investment Center of the Israeli Ministry of Industry, Trade and Labor. Further, at the time the Company filed its 2012 Israeli tax return, the Company made an election for a “Benefited Enterprise” program. Under these programs, the Company is

F-44
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




eligible for tax benefits under the Israeli Law for Encouragement of Capital Investments, 1959. Under the terms of these programs, subject to certain prescribed conditions, income attributable to each Enterprise is exempt from income tax for a period of two years and is subject to a reduced income tax rate for the subsequent five to 15 years (generally 10%-15%, depending on the percentage of foreign (non-Israeli) investment in the Company). The Company was notified that it is no longer meeting the research and development investment condition which relates to these programs. As a result, the tax benefits under the “Approved Enterprise” program were reduced and the “Benefited Enterprise” program will most likely not become effective. When the “Benefited Enterprise” program is not in effect and when the other “Approved Enterprise” programs expire, an alternative income tax rate of 16% can be requested from the authorities within the “Preferred Enterprise” path under the Law for Encouragement of Capital Investments, 1959. The changes in tax rate, prompted by the notice referred to above, to 13.57% - 16% were reflected in the Company’s financial statements during the fourth quarter of the fiscal year ended January 31, 2014 resulting in an increase in net deferred tax items and an offsetting valuation allowance of $43.7 million as of January 31, 2014. This tax rate change has been reflected in the effective income tax rate reconciliation above and had no net impact on Income Tax Expense for the fiscal year ended January 31, 2014.  
 
During the three months ended January 31, 2013, the Company received a tax refund from the State of Israel of $24.8 million, including interest of $6.0 million. The interest refunded was recognized in the Statements of Operations upon receipt due to the uncertainty of collectability. Comverse's accounting policy is to record interest income on tax payments in tax expense in the statements of operations.
Deferred income taxes are provided for the effects of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. Significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows:
 
 
As of Fiscal Years Ended January 31,
 
 
2014
 
2013
 
 
(In thousands)
Deferred tax assets:
 
 
 
 
Deferred revenue
 
$
55,974

 
$
92,048

Loss carryforwards
 
109,963

 
66,582

Stock-based and other compensation
 
8,666

 
13,704

Tax credits - net of foreign withholding taxes
 
48,156

 
54,463

Other intangibles
 
18,399

 
23,901

Property and equipment, net
 
3,491

 
3,786

Other
 
18,471

 
3,307

Total deferred tax assets
 
$
263,120

 
$
257,791

Deferred tax liabilities:
 
 
 
 
Deferred cost of revenue
 
$
(15,389
)
 
$
(61,298
)
Goodwill
 
(21,314
)
 
(19,435
)
Other
 
—

 
(3,687
)
Total deferred tax liabilities
 
$
(36,703
)
 
$
(84,420
)
Valuation allowance
 
(266,617
)
 
(195,468
)
Net deferred income tax liability
 
$
(40,200
)
 
$
(22,097
)
Recognized as:
 
 
 
 
Current deferred income tax assets
 
$
2,329

 
$
17,938

Noncurrent deferred income tax assets
 
1,720

 
9,421

Current deferred income tax liabilities
 
(514
)
 
(7,689
)
Noncurrent deferred income tax liabilities
 
(43,735
)
 
(41,767
)
Total
 
$
(40,200
)
 
$
(22,097
)
U.S. income and foreign withholding taxes have not been recorded on permanently reinvested earnings of certain subsidiaries aggregating $182.3 million as of January 31, 2014. At this time, determination of the amounts of deferred U.S. federal and state income taxes and foreign withholding taxes related to these earnings is not practicable. As of January 31, 2014, $149.0 million of earnings from certain subsidiaries are not considered to be permanently reinvested and therefore, foreign withholding taxes of $20.1 million have been accrued. A portion of the earnings of subsidiaries in the following countries are

F-45
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




not considered permanently reinvested: Australia, Israel, Brazil, Canada, Hong Kong, New Zealand, Mexico, Portugal, Netherlands, and the United Kingdom.
The Company has net operating loss carryforwards (“NOLs”) for tax purposes and other deferred tax benefits that are available to offset future taxable income.
The Company’s gross NOLs for tax return purposes are as follows:
 
 
 
Fiscal Years Ended January 31,
 
 
2014
 
2013
 
 
(In thousands)
U.S. Federal NOLs
 
$
459,784

 
$
362,273

U.S. State NOLs
 
326,938

 
253,790

Foreign NOLs
 
813,203

 
798,746

The U.S. federal NOL carry forwards expire in various years ending from January 31, 2016 to January 31, 2032. The U.S. state NOL carry forwards expire in various years ending from January 31, 2015 to January 31, 2031. At January 31, 2014, all but $9.4 million of the foreign NOLs have indefinite carryforward periods. The table above reflects gross NOLs for tax return basis which are different from financial statement NOLs, primarily due to the reduction of the financial statement NOLs under the FASB's guidance on accounting for uncertainty in income taxes. The Company has U.S. federal, state and foreign tax credit carryforwards of approximately $50.3 million and $63.5 million as of January 31, 2014 and 2013, respectively. The utilization of these carryforwards is subject to limitations. The federal AMT credit has no expiration date. The foreign tax credit carryforwards expire in various years ending from January 31, 2015 to 2018.
In accordance with the FASB’s guidance relating to accounting for uncertainty in income taxes the Company recognizes unrecognized tax benefits in non-current tax liabilities. The following table reconciles the amounts recorded for unrecognized tax benefits for the fiscal years ended January 31, 2014, 2013 and 2012:
 
 
Fiscal Years Ended January 31,
 
 
2014
 
2013
 
2012
 
 
(In thousands)
Gross unrecognized tax benefits as of February 1
 
$
278,602

 
$
287,846

 
$
280,703

Increases related to tax positions taken in prior years
 
29,520

 
4,151

 
6,636

Decreases related to tax positions taken in prior years
 
(11,671
)
 
(14,665
)
 
(2,549
)
Increases related to tax positions in current year
 
5,970

 
6,835

 
12,769

Decreases related to tax positions in current year
 
—

 
—

 
—

Decreases due to settlements with taxing authorities
 
(1,500
)
 
(2,985
)
 
(369
)
Reductions resulting from lapse in statute of limitations
 
(1,072
)
 
(2,140
)
 
(6,019
)
Increases (decreases) related to foreign currency exchange rate fluctuations
 
1,325

 
(440
)
 
(3,325
)
Gross unrecognized tax benefits as of January 31
 
$
301,174

 
$
278,602

 
$
287,846

The balances of unrecognized tax benefits as of January 31, 2014, 2013 and 2012 are $301.2 million, $278.6 million and $287.8 million of which $90.5 million, $104.2 million and $95.2 million represent the amounts that, if recognized, may impact the effective income tax rate in future periods.
The Company recognized interest and penalties related to unrecognized tax benefits in its income tax expense. As of January 31, 2014 and 2013, the Company accrued $39.2 million and $51.1 million for interest and penalties, respectively.
The Company estimates that it is reasonably possible that the balance of unrecognized tax benefits as of January 31, 2014 may decrease by approximately $1.3 million in the next twelve months, as a result of lapse of statutes of limitation and settlements with tax authorities. These unrecognized tax benefits relate to permanent establishment and other tax positions in the amounts of $0.6 million and $0.8 million, respectively.
The significant tax jurisdictions in which the Company is currently under examination by tax authorities include Canada, India, Indonesia, Israel and United Kingdom. The Company anticipates that it is reasonably possible that new tax matters could be raised by tax authorities that may require increases or decreases to the balance of unrecognized tax benefits; however, an estimate of such increases or decreases cannot be made.

F-46
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




The Company files income tax returns in the U.S. federal, various state and local, and foreign tax jurisdictions. As of January 31, 2014, the Company has open tax years which can be subject to tax audit (and in some cases are under tax audit) in the following major jurisdictions:
Jurisdiction
 
Tax Years Ended
United States
 
January 31, 1999 - January 31, 2014
Israel
 
January 31, 2006 - January 31, 2014
United Kingdom
 
December 31, 2005 - January 31, 2014
India
 
March 31, 2002 - March 31, 2013
France
 
January 31, 2008 - January 31, 2014
Brazil
 
December 31, 2004, December 31, 2009 - December 31, 2013
Canada
 
January 31, 2007 - January 31, 2014
Various U.S. States
 
January 31, 1999 - January 31, 2014
The Company regularly assesses the adequacy of its provisions for income tax contingencies in accordance with the FASB's guidance. As a result, the Company may adjust the liabilities for unrecognized tax benefits for the impact of new facts and developments, such as changes to interpretations of relevant tax law, assessments from taxing authorities, settlements with taxing authorities, and lapses of statutes of limitations.
The Company maintains valuation allowances in jurisdictions where it is more-likely-than-not that all or a portion of a deferred tax asset may not be realized. In determining whether a valuation allowance is warranted, the Company evaluates factors such as prior earnings history, expected future earnings, reversal of existing taxable temporary differences, carry-back and carry-forward periods and tax strategies that could potentially enhance the likelihood of the realization of a deferred tax asset. Changes in valuation allowances are included in the Company's tax provision in the period of change except for items related to additional paid-in capital. During the fiscal year ended January 31, 2014, the Company recorded an increase of $71.1 million to its valuation allowance related primarily to net operating losses in the U.S. and foreign jurisdictions and other changes related to the effects of the Tax Disaffiliation Agreement entered into in connection with the Share Distribution.
The Company’s activity in the valuation allowance is as follows:
 
 
Balance at Beginning of Fiscal Year
 
Additions Charged (Credited) to Expenses
 
Other
 
Balance at End of Fiscal Year
 
 
(In thousands)
Valuation allowance on income tax assets:
 
 
 
 
 
 
 
 
Fiscal Year Ended January 31, 2014
 
$
(195,468
)
 
$
(31,655
)
 
$
(39,494
)
 
$
(266,617
)
Fiscal Year Ended January 31, 2013
 
$
(231,209
)
 
$
22,724

 
$
13,017

 
$
(195,468
)
Fiscal Year Ended January 31, 2012
 
$
(224,226
)
 
$
(7,379
)
 
$
396

 
$
(231,209
)

F-47
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




20.
BUSINESS SEGMENT INFORMATION
The Company’s reportable segments consist of BSS and Digital Services. The results of operations of the Company’s global corporate functions that support its business units are included in the column captioned “All Other” as part of the Company’s business segment presentation. The Company does not maintain balance sheets for its operating segments.
Historically, Mobile Internet (“Comverse MI”), which was renamed Policy and is responsible for the Company's mobile Internet and policy products, and Netcentrex, an IP-based solution that provides carrier-hosted enterprise and consumer IP services, were included in All Other. Effective in the fourth quarter of fiscal 2013, Comverse MI and Netcentrex have been combined with the Comverse BSS and Comverse VAS segments, respectively, to form “BSS” and “Digital Services” segments. The change in segment reporting aligns with information reviewed by the Company's CODM, a change in management structure and the convergence of operations to take advantage of potential synergies. Accordingly, the results presented under segment reporting reflect the change in segment reporting for all periods presented to conform to the current period segment reporting structure. The change in segment reporting does not affect the Company’s previously reported consolidated and combined financial statements.
Starhome results of operations are included as discontinued operations and therefore are not presented in segment information.
Segment Performance
The Company evaluates its business by assessing the performance of each of its operating segments. The Company’s Chief Executive Officer is its CODM. The CODM uses segment performance, as defined below, as the primary basis for assessing the financial results of the operating segments and for the allocation of resources. Segment performance, as the Company defines it in accordance with the FASB’s guidance relating to segment reporting, is not necessarily comparable to other similarly titled captions of other companies.
Segment performance is computed by management as income (loss) from operations adjusted for the following: (i) stock-based compensation expense; (ii) amortization of intangible assets; (iii) compliance-related professional fees; (iv) compliance-related compensation and other expenses; (v) spin-off professional fees; (vi) Italian VAT recovery recorded within operating expense; (vii) impairment of goodwill; (viii) impairment of property and equipment; (ix) certain litigation settlements and related costs; (x) restructuring expenses; and (xi) certain other gains and expenses. Compliance-related professional fees and compliance-related compensation and other expenses relate to fees and expenses recorded in connection with CTI’s and the Company's efforts to (a) complete certain financial statements and audits of such financial statements and (b) remediate material weaknesses in internal control over financial reporting.


F-48
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




The tables below present information about total revenue, total costs and expenses, income (loss) from operations, segment performance, interest expense, and depreciation and amortization for the fiscal years ended January 31, 2014, 2013 and 2012:
 
 

BSS
 
Digital Services
 
All Other
 
Consolidated
 
(In thousands)
Fiscal Year Ended January 31, 2014
 
 
 
 
 
 
 
Total revenue
$
299,561

 
$
352,940

 
$
—

 
$
652,501

Total costs and expenses
$
254,925

 
$
225,932

 
$
133,945

 
$
614,802

Income (loss) from operations
$
44,636

 
$
127,008

 
$
(133,945
)
 
$
37,699

Computation of segment performance:
 
 
 
 
 
 
 
Segment revenue
$
299,561

 
$
352,940

 
$
—

 
 
Total costs and expenses
$
254,925

 
$
225,932

 
$
133,945

 
 
Segment expense adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense
—

 
—

 
10,208

 
 
Amortization of intangible assets
2,765

 
—

 
—

 
 
Compliance-related professional fees
—

 
—

 
2,144

 
 
Compliance-related compensation and other expenses
122

 
216

 
(139
)
 
 
Italian VAT recovery recorded within operating expense
—

 
—

 
(10,861
)
 
 
Impairment of property and equipment
28

 
—

 
454

 
 
Certain litigation settlements and related cost
—

 
—

 
(16
)
 
 
Restructuring expenses
—

 
—

 
10,783

 
 
Gain on sale of fixed assets
—

 
—

 
(41
)
 
 
Other
6

 
—

 
3,281

 
 
Segment expense adjustments
2,921

 
216

 
15,813

 
 
Segment expenses
252,004

 
225,716

 
118,132

 
 
Segment performance
$
47,557

 
$
127,224

 
$
(118,132
)
 
 
Interest expense
$
—

 
$
—

 
$
(847
)
 
$
(847
)
Depreciation
$
(3,738
)
 
$
(5,040
)
 
$
(7,489
)
 
$
(16,267
)
 

F-49
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




 

BSS
 
Digital Services
 
All Other
 
 Combined
 
(In thousands)
Fiscal Year Ended January 31, 2013
 
 
 
 
 
 
 
Total revenue
$
295,803

 
$
378,918

 
$
3,042

 
$
677,763

Total costs and expenses
$
277,128

 
$
248,028

 
$
154,799

 
$
679,955

Income (loss) from operations
$
18,675

 
$
130,890

 
$
(151,757
)
 
$
(2,192
)
Computation of segment performance:
 
 
 
 
 
 
 
Segment revenue
$
295,803

 
$
378,918

 
$
3,042

 
 
Total costs and expenses
$
277,128

 
$
248,028

 
$
154,799

 
 
Segment expense adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense
—

 
—

 
7,517

 
 
Amortization of intangible assets
14,124

 
—

 
—

 
 
Compliance-related professional fees
—

 
—

 
245

 
 
Compliance-related compensation and other expenses
877

 
2,314

 
(1,093
)
 
 
Strategic evaluation related costs
—

 
—

 
933

 
 
Impairment of goodwill
5,605

 
—

 
—

 
 
Impairment of property and equipment
2

 
—

 
402

 
 
Certain litigation settlements and related costs
—

 
(151
)
 
(509
)
 
 
Restructuring expenses
—

 
—

 
5,905

 
 
Gain on sale of fixed assets
—

 
—

 
(185
)
 
 
Other
—

 
—

 
1,621

 
 
Segment expense adjustments
20,608

 
2,163

 
14,836

 
 
Segment expenses
256,520

 
245,865

 
139,963

 
 
Segment performance
$
39,283

 
$
133,053

 
$
(136,921
)
 
 
Interest expense
$
—

 
$
—

 
$
(901
)
 
$
(901
)
Depreciation
$
(3,757
)
 
$
(4,999
)
 
$
(8,985
)
 
$
(17,741
)
 

F-50
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




 

BSS
 
Digital Services
 
All Other
 
 Combined
 
(In thousands)
Fiscal Year Ended January 31, 2012
 
 
 
 
 
 
 
Total revenue
$
388,350

 
$
379,714

 
$
3,093

 
$
771,157

Total costs and expenses
$
326,080

 
$
261,678

 
$
171,957

 
$
759,715

Income (loss) from operations
$
62,270

 
$
118,036

 
$
(168,864
)
 
$
11,442

Computation of segment performance:
 
 
 
 
 
 
 
Segment revenue
$
388,350

 
$
379,714

 
$
3,093

 
 
Total costs and expenses
$
326,080

 
$
261,678

 
$
171,957

 
 
Segment expense adjustments:
 
 
 
 
 
 
 
Stock-based compensation expense
—

 
—

 
3,660

 
 
Amortization of intangible assets
17,308

 
—

 
—

 
 
Compliance-related professional fees
—

 
—

 
10,901

 
 
Compliance-related compensation and other expenses
2,447

 
2,205

 
2,067

 
 
Impairment of property and equipment
390

 
741

 
1,200

 
 
Certain litigation settlements and related costs
—

 
—

 
804

 
 
Restructuring expenses
—

 
—

 
20,728

 
 
Other
—

 
19

 
(67
)
 
 
Segment expense adjustments
20,145

 
2,965

 
39,293

 
 
Segment expenses
305,935

 
258,713

 
132,664

 
 
Segment performance
$
82,415

 
$
121,001

 
$
(129,571
)
 
 
Interest expense
$
—

 
$
—

 
$
(953
)
 
$
(953
)
Depreciation
$
(4,122
)
 
$
(4,553
)
 
$
(8,182
)
 
$
(16,857
)
The Company does not maintain balance sheets for the BSS and Digital Services operating segments and therefore is unable to present total assets for BSS, Digital Services and Comverse Other.
Revenue by major geographical region is based upon the geographic location of the customers who purchase the Company's products and services. The geographical locations of distributors, resellers and systems integrators who purchase products and utilize the Company's services may be different from the geographical locations of end customers. Revenue by geographic region and revenue by geographic region as a percentage of total revenue was as follows:
 
 
 
Fiscal Years Ended January 31,
 
 
2014
 
2013
 
2012
 
 
(Dollars in thousands)
United States
 
$
176,029

 
27
%
 
$
147,376

 
22
%
 
$
93,901

 
12
%
India
 
45,640

 
7
%
 
48,412

 
7
%
 
57,543

 
7
%
Japan
 
42,787

 
7
%
 
68,263

 
10
%
 
43,243

 
6
%
Italy
 
31,461

 
5
%
 
22,338

 
3
%
 
24,578

 
3
%
Australia
 
28,655

 
4
%
 
33,017

 
5
%
 
43,249

 
6
%
Russia
 
26,367

 
4
%
 
39,585

 
6
%
 
73,818

 
10
%
Other Foreign (1)
 
301,562

 
46
%
 
318,772

 
47
%
 
434,825

 
56
%
Total
 
$
652,501

 
100
%
 
$
677,763

 
100
%
 
$
771,157

 
100
%
 
(1)
Other foreign consists of numerous countries, none of which represents more than 5% of total revenue in any fiscal year presented.
Long-lived assets primarily consist of property and equipment, net, capitalized software development costs, net, and deferred costs of revenue. The Company believes that property and equipment, net, is exposed to the geographic area risks and uncertainties more than other long-lived assets, because these tangible assets are difficult to move and are relatively illiquid.

F-51
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




Property and equipment, net, by country of domicile consists of the following:
 
 
 
January 31,
 
 
2014
 
2013
 
2012
 
 
(In thousands)
Israel
 
$
28,822

 
$
28,176

 
$
33,484

United States
 
6,596

 
5,871

 
6,688

Other
 
6,123

 
3,395

 
4,515

 
 
$
41,541

 
$
37,442

 
$
44,687

21.
SUPPLEMENTAL CASH FLOW INFORMATION
The following represents non-cash activities and supplemental information to the consolidated statements of cash flows:
 
 
Fiscal Years Ended January 31,
 
 
2014
 
2013
 
2012
 
 
(In thousands)
Non-cash investing transactions—continuing operations:
 
 
 

 
 
Accrued but unpaid purchases of property and equipment
 
$
5,056

 
$
297

 
$
312

Inventory transfers to property and equipment
 
$
4,001

 
$
3,462

 
$
18,190

Non-cash financing transactions—continuing operations:
 
 
 
 
 
 
Contributions and forgiveness of debt by CTI
 
$
—

 
$
18,900

 
$
—

Cash paid during the year for interest—continuing operations(1)
 
$
—

 
$
—

 
$
363

Cash paid during the year for income taxes net of amounts refunded—continuing operations
 
$
7,417

 
$
(15,216
)
 
$
4,943

(1) including interest paid to affiliate.

22.
RELATED PARTY TRANSACTIONS
Share Distribution Agreements
The Company entered into a distribution agreement (the “Distribution Agreement”), transition services agreement, tax disaffiliation agreement and employee matters agreement (collectively, the “Share Distribution Agreements”) with CTI in connection with the Share Distribution (see Note 3, Expense Allocations and Share Distribution Agreements).
Note Payable to CTI and Loan Agreement with CTI
The Company entered into a promissory note and a revolving loan agreement with CTI. The note payable and loan balances of $9.4 million and $9.0 million, respectively, were settled through a capital contribution to the Company's equity by CTI concurrently with the Share Distribution (see Note 11, Debt).
Other Arrangements with CTI
CTI provided a variety of services to the Company (see Note 3, Expense Allocations and Share Distribution Agreements).
23.
LEASES
The Company leases office and warehouse space, as well as certain equipment and vehicles, under non-cancelable operating leases. Gross rent expense was $19.6 million, $18.9 million and $21.6 million in the fiscal years ended January 31, 2014, 2013 and 2012, respectively. Sublease income was $2.1 million, $1.9 million and $2.0 million, in the fiscal years ended January 31, 2014, 2013 and 2012 respectively.
The majority of the Company's leases include options that allow it to renew or extend the lease term beyond the initial lease period, subject to terms and conditions agreed upon at the inception of the lease. Such terms and conditions include rental rates agreed upon at the inception of the lease that could represent below-or above-market rental rates later in the life of the lease, depending upon market conditions at the time of such renewal or extension.

F-52
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




The Company has entered into various sublease agreements to lease excess space. As of January 31, 2014, the minimum annual rent obligations (excluding taxes, maintenance and other pass-throughs), sublease income to be received under non-cancelable subleases, and minimum net rentals of the Company are as follows for the fiscal years ending January 31:
 
(In thousands)
Minimum
Lease
Commitments
 
Noncancellable
Subleases
 
Minimum
Net
Rentals
2015
$
17,420

 
$
2,116

 
$
15,304

2016
11,763

 
176

 
11,587

2017
9,364

 
—

 
9,364

2018
7,013

 
—

 
7,013

2019
5,956

 
—

 
5,956

2020 and thereafter
27,256

 
—

 
27,256

 
$
78,772

 
$
2,292

 
$
76,480

In May 2012, the Company entered into an agreement for the lease of a facility in Ra'anana, Israel that is intended to replace its existing office space in Tel Aviv, Israel. The lease includes an option to terminate up to 30% of the Company's leased space in the building subject to a penalty. During the fiscal year ended January 31, 2014, the Company exercised this option and returned 27% of the leased space and recorded a liability for the termination penalty of $1.7 million during the fiscal year ended January 31, 2014. The term of the lease is for 10 years, expected to commence in October 2014. In addition, the Company has the right to extend the term of the lease by up to 5 years. The annual base rent under the agreement after partial return of office space, for approximately 218,912 square feet is expected to be $4.5 million. The Company expects that this facility will be used by BSS and Digital Services and the other operations included in All Other.
In connection with the 2012 restructuring initiative, certain office space, including offices in New York, New York and a partial return of offices in Ra'anana, Israel, have been vacated or consolidated upon expiration of leases.
24.
COMMITMENTS AND CONTINGENCIES
Indemnifications
In the normal course of business, the Company provides indemnifications of varying scopes to customers against claims of intellectual property infringement made by third parties arising from the use of the Company's products. The Company evaluates its indemnifications for potential losses and in its evaluation considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Generally, the Company has not encountered significant expenses as a result of such indemnification provisions.
To the extent permitted under state laws or other applicable laws, the Company has agreements in which it agreed to indemnify its directors and officers for certain events or occurrences while the director or officer is, or was, serving at the Company's request in such capacity. The indemnification period covers all pertinent events and occurrences during the Company's director's or officer's lifetime. The maximum potential amount of future payments that the Company could be required to make under these indemnification agreements is unlimited; however, the Company has certain director and officer insurance coverage that limits the Company's exposure and enables the Company to recover a portion of any future amounts paid. The Company is not able to estimate the fair value of these indemnification agreements in excess of applicable insurance coverage, if any.
In addition, under the Share Distribution Agreements the Company entered into in connection with the Share Distribution, the Company has agreed to indemnify CTI and its affiliates (including Verint following the Verint Merger) against certain losses that may arise as a result of the Verint Merger and the Share Distribution (see Note 3, Expense Allocations and Share Distribution Agreements). On February 4, 2013, in connection with the closing of the Verint Merger Agreement, CTI placed $25.0 million in escrow to support indemnification claims to the extent made against the Company by Verint and any cash balance remaining in such escrow fund 18 months after the closing of the Verint Merger, less any claims made on or prior to such date, will be released to the Company. Although no indemnification claims have been filed and the Escrow Release Date is within 12 months of January 31, 2014, the Company continues to classify the restricted cash balance as "Long-term restricted cash" in the Consolidated Balance Sheets until it can be determined if any future claims would restrict the release of such escrow funds.
As a result of the Verint Merger, Verint assumed certain rights and liabilities of CTI, including any liability of CTI arising out of the actions discussed below. Under the terms of the Distribution Agreement between CTI and us relating to the Share

F-53
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




Distribution, Verint, as successor to CTI, is entitled to indemnification from us for any losses it suffers in its capacity as successor-in-interest to CTI in connection with these actions. As of the closing of the Verint Merger, the Company recognized the estimated fair value of the potential indemnification liability (see Note 1, Organization, Business and Summary of Significant Accounting Policies).
Israeli Optionholder Class Action
CTI and certain of its former subsidiaries, including Comverse Ltd. (a subsidiary of the Company), were named as defendants in four potential class action litigations in the State of Israel involving claims to recover damages incurred as a result of purported negligence or breach of contract due to previously-settled allegations regarding illegal backdating of CTI options that allegedly prevented certain current or former employees from exercising certain stock options. The Company intends to vigorously defend these actions.
Two cases were filed in the Tel Aviv District Court against CTI on March 26, 2009, by plaintiffs Katriel (a former Comverse Ltd. employee) and Deutsch (a former Verint Systems Ltd. employee). The Katriel case (Case Number 1334/09) and the Deutsch case (Case Number 1335/09) both seek to approve class actions to recover damages that are claimed to have been incurred as a result of CTI’s negligence in reporting and filing its financial statements, which allegedly prevented the exercise of certain stock options by certain employees and former employees. By stipulation of the parties, on September 30, 2009, the court ordered that these cases, including all claims against CTI in Israel and the motion to approve the class action, be stayed until resolution of the actions pending in the United States regarding stock option accounting, without prejudice to the parties’ ability to investigate and assert the unique facts, claims and defenses in these cases. On May 7, 2012, the court lifted the stay, and the plaintiffs have filed an amended complaint and motion to certify a class of plaintiffs in a single consolidated class action. The defendants responded to this amended complaint on November 11, 2012, and the plaintiffs filed a further reply on December 20, 2012. A pre-trial hearing for the case was held on December 25, 2012, during which all parties agreed to attempt to settle the dispute through mediation. The mediation process is currently ongoing.
Separately, on July 13, 2012, plaintiffs filed a motion seeking an order that CTI hold back $150 million in assets as a reserve to satisfy any potential damage awards that may be awarded in this case, but did not seek to enjoin the Share Distribution. The Company does not believe that the motion has merit. On July 25, 2012, the court indicated that it will not rule on the motion until after it rules on plaintiffs’ motion to certify a class of plaintiffs. On August 16, 2012, plaintiffs filed a motion for leave to appeal the court’s order to the Israeli Supreme Court and on November 11, 2012, CTI responded to plaintiff's motion. The parties are awaiting a decision.
Two cases were also filed in the Tel Aviv Labor Court by plaintiffs Katriel and Deutsch, and both sought to approve class actions to recover damages that are claimed to have been incurred as a result of breached employment contracts, which allegedly prevented the exercise by certain employees and former employees of certain CTI and Verint stock options, respectively. The Katriel litigation (Case Number 3444/09) was filed on March 16, 2009, against Comverse Ltd., and the Deutsch litigation (Case Number 4186/09) was filed on March 26, 2009, against Verint Systems Ltd. The Tel Aviv Labor Court has ruled that it lacks jurisdiction, and both cases have been transferred to the Tel Aviv District Court. These cases have been consolidated with the Tel Aviv District Court cases discussed above. The Company did not accrue for these matters as the potential loss is currently not probable or estimable.
An additional case has been filed by an individual plaintiff similarly seeking to recover damages up to an aggregate of $3.3 million allegedly incurred as a result of the inability to exercise certain stock options. The case generally alleges the same causes of actions alleged in the potential class action discussed above.
On February 4, 2013, Verint and CTI completed the Verint Merger. As a result of the Verint Merger, Verint assumed certain rights and liabilities of CTI, including any liability of CTI arising out of the actions discussed above. However, under the terms of the Distribution Agreement between CTI and the Company relating to the Share Distribution, Verint, as successor to CTI, is entitled to indemnification from the Company for any losses it suffers in its capacity as successor-in-interest to CTI in connection with these actions.

F-54
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




Guarantees
The Company provides certain customers in the ordinary course of business with financial performance guarantees, which in certain cases are backed by standby letters of credit or surety bonds, the majority of which are cash collateralized and accounted for as restricted cash and bank time deposits. The Company is only liable for the amounts of those guarantees in the event of its nonperformance, which would permit the customer to exercise the guarantee. As of January 31, 2014 and 2013, the Company believes that it was in compliance with its performance obligations under all contracts for which there is a financial performance guarantee, and that any liabilities arising in connection with these guarantees will not have a material adverse effect on the Company’s consolidated and combined results of operations, financial position or cash flows. The Company also obtained bank guarantees primarily to provide customer assurance relating to the performance of certain obligations required by customer agreements for the guarantee of certain payment obligations. These guarantees, which aggregated $33.4 million and $31.1 million as of January 31, 2014 and 2013, respectively, are generally scheduled to be released upon the Company’s performance of specified contract milestones, a majority of which are scheduled to be completed at various dates through December 31, 2015.
Unconditional Purchase Obligations
In the ordinary course of business, the Company enters into certain unconditional purchase obligations, which are agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. The Company had unconditional purchase obligations of approximately $16.2 million as of January 31, 2014. Of these obligations, $11.5 million are due in the next twelve months and $4.7 million are due in one to three years.
Litigation Overview
Except as disclosed below, the Company does not believe that it is currently party to any other claims, assessments or pending legal action that could reasonably be expected to have a material adverse effect on its business, financial condition or results of operations.
Legal Proceedings
From time to time, the Company and its subsidiaries are subject to claims in legal proceedings arising in the normal course of business. The Company does not believe that it or its subsidiaries are currently party to any pending legal action not described herein or disclosed in the consolidated and combined financial statements that could reasonably be expected to have a material adverse effect on its business, financial condition or results of operations.
Brazil Tax and Labor Contingencies
The Company's operations in Brazil are involved in various litigation matters and have received or been the subject of numerous governmental assessments related to indirect and other taxes, as well as disputes associated with former Company employees. The tax matters, which comprise a significant portion of the contingencies, principally relate to claims for taxes on the transfers of inventory, municipal service taxes on rentals and gross revenue taxes. The Company is disputing these tax matters and intends to vigorously defend its positions. The labor matters principally relate to claims made by former Company employees for pay wages, social security and other related labor benefits, as well as related tax obligations. As of January 31, 2014, the total amounts related to the reserved portion of the tax and labor contingencies was $0.1 million and the unreserved portion of the tax and labor contingencies totaled approximately $8.7 million. With respect to the unreserved balance, these have been assessed by management as being either remote or possible as to the likelihood of ultimately resulting in a loss to the Company. Local laws and regulations often require that the Company make deposits or post other security in connection with such proceedings. As of January 31, 2014, the Company had $6.8 million of deposits with the government in Brazil for claims that the Company is disputing which provides security with respect to these matters. Generally, any deposits would be refundable to the extent the matters are resolved in the Company's favor. Management routinely assesses these matters as to probability of ultimately incurring a liability against the Company's Brazilian operations and the Company records its best estimate of the ultimate loss in situations where management assesses the likelihood of an ultimate loss as probable.
France Labor Contingency
A former employee based in France has filed a notice of appeal in the appellate court, seeking to overturn a decision of the Labor Court rejecting his claim to requalify his resignation as a constructive dismissal and for damages in the Labor Court of approximately $2.8 million. The Company is disputing this appeal and intends to vigorously defend it. The Company has not accrued for this matter as the potential loss is not currently probable. 

F-55
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




Italy VAT
The Company applied for Italian VAT refunds for the periods 2004 to 2010. However, collectability was deemed uncertain, as a result of the Italian financial crisis and other matters. On April 30, 2013, the Company received a refund approximating $10.9 million, which was recognized as a reduction of service costs in the consolidated statement of operations for the fiscal year ended January 31, 2014.
25.
QUARTERLY INFORMATION (UNAUDITED)
The following table shows selected results of operations for each of the quarters during the fiscal years ended January 31, 2014 and 2013:
 
 
Fiscal Quarters Ended
 
 
April 30, 2013
 
July 31, 2013
 
October 31, 2013
 
January 31, 2014
 
 
(In thousands, except per share data)
 
 
(UNAUDITED)
Revenue
 
$
155,818

 
$
169,753

 
$
160,416

 
$
166,514

Income from operations (1)
 
7,843

 
11,427

 
14,704

 
3,725

Net (loss) income (2)
 
(3,140
)
 
(17,087
)
 
23,136

 
15,777

(Loss) earnings per share (3)
 
 
 
 
 
 
 
 
     Basic
 
$
(0.14
)
 
$
(0.77
)
 
$
1.04

 
$
0.71

     Diluted
 
$
(0.14
)
 
$
(0.77
)
 
$
1.03

 
$
0.70

(1) Income from operations for the fiscal quarter ended January 31, 2014 was impacted by the recording of loss contract reserves of $7.1 million for three contracts accounted for under the Percentage of Completion method of revenue recognition.
(2) Our tax provision is subject to significant year over year and quarter-to-quarter variability. Due to the interim tax requirements, the Company recorded $29.9 million of income tax expense for the three months ended July 31, 2013 and $11.3 million of income tax benefit for the three months ended October 31, 2013. The Company recorded net reversals of uncertain tax position liabilities of $16.5 million for the three months ended January 31, 2014.
(3) Amounts may not total to annual earnings (loss) per share attributable to Comverse, Inc.'s stockholders because each quarter and year are calculated separately based on basic and diluted weighted-average common shares outstanding during that period.


F-56
COMVERSE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)




 
 
Fiscal Quarters Ended
 
 
April 30, 2012
 
July 31, 2012
 
October 31, 2012
 
January 31, 2013
 
 
(In thousands, except per share data)
 
 
(UNAUDITED)
Revenue
 
$
137,750

 
$
171,226

 
$
185,200

 
$
183,587

(Loss) income from operations
 
(22,883
)
 
13,790

 
1,312

 
5,589

Net (loss) income attributable to Comverse, Inc.
 
 
 
 
 
 
 
 
Net (loss) income from continuing operations
 
(26,597
)
 
6,101

 
(10,575
)
 
10,777

Loss from discontinued operations, net of tax
 
429

 
4,282

 
21,831

 
—

Net (loss) income
 
(26,168
)
 
10,383

 
11,256

 
10,777

Less: Net income attributable to noncontrolling interest
 
$
(154
)
 
$
(856
)
 
$
(157
)
 
$
—

Net (loss) income attributable to Comverse, Inc.
 
$
(26,322
)
 
$
9,527

 
$
11,099

 
$
10,777

Net (loss) income from continuing operations attributable to Comverse, Inc.:
 
 
 
 
 
 
 
 
Basic and diluted
 
$
(26,597
)
 
$
6,101

 
$
(10,575
)
 
$
10,777

(Loss) earnings per share from continuing operations attributable to Comverse, Inc.’s Stockholders:
 
 
 
 
 
 
 
 
Basic and diluted (1)
 
$
(1.21
)
 
$
0.28

 
$
(0.48
)
 
$
0.49

Income from discontinued operations, net of tax, attributable to Comverse, Inc.:
 
 
 
 
 
 
 
 
Basic and diluted
 
275

 
3,426

 
21,674

 
—

Earnings per share from discontinued operations attributable to Comverse, Inc.’s Stockholders:
 
 
 
 
 
 
 
 
Basic and diluted
 
$
0.01

 
$
0.15

 
$
0.99

 
$
—

(Loss) earnings per share attributable to Comverse, Inc.’s Stockholders:
 
 
 
 
 
 
 
 
Basic and diluted
 
$
(1.20
)
 
$
0.43

 
$
0.51

 
$
0.49


The computation of basic and diluted loss per share for all periods through October 31, 2012, is calculated using the number of shares of Comverse, Inc. common stock outstanding on October 31, 2012, following the Distribution.
The unaudited quarterly information shown above reflects the presentation of discontinued operations for the quarters in the fiscal year ended 2013 as a result of the Starhome Disposition on October 19, 2012 (see Note 16, Discontinued Operations).
26.
SUBSEQUENT EVENTS
Common Stock Repurchase
The Company’s Board of Directors has adopted a program to repurchase from time to time at management’s discretion up to $30.0 million in shares of its common stock on the open market during the 18-month period ending October 9, 2015 at prevailing market prices. Repurchases will be made under the program using the Company’s own cash resources.



F-57